Written by: Casey Law | GFDA Contributor
Photo: Avel Chuklanov
Those of us in the design + building industry, or just in the market for a new home, are all too aware of the rising cost of housing. It’s mainly being driven up by high demand and a limited supply on the market. Bidding wars in some regions are commonplace, especially if you live out West. While land costs continue to rise, for most Americans it’s the construction of the house that is the most significant expense. The cost of building a home has also skyrocketed in recent years as supply chain disruptions have caused material costs and delivery times to increase.
We decided to take a deeper dive and break down the specific costs for building a home in these current market conditions, and see if there are ways to reduce costs. The answers, it seems, largely depend upon where you live.
Homebuilding costs in the United States are broken down into three major expense categories: hard costs, soft costs, and land costs. Let’s have a look at each of these.
I. Hard costs
Hard costs account for 56% of the total cost of building a house and relate to the construction of the physical building itself. These costs are generally fixed and are split roughly 50/50 between labor and material. There’s a lot that contributes to hard costs, so it’s important to understand the breakdown.
Framing and Foundations represent about 30% of the total costs of constructing a new home. The next highest cost expenditures are HVAC, Plumbing and Electrical, representing about 19% of the total costs, inclusive of both materials and labor. Below is a breakdown of the hard construction costs for a single-family home in the United States.
Source: Construction Physics; a newsletter produced in partnership with the Institute for Progress, a Washington, DC-based think tank. You can learn more about their work by visiting their website: https://ifp.org/ For more information on ILF and the newsletter contact: briancpotter@gmail.com
Supply chain, market conditions, and geographical location all impact these costs. California, for example, has one of the highest building costs in the country, averaging $440 per square foot compared to Texas and Florida’s $300 per square foot. However, in the San Francisco Bay, that number rises to a whopping $1,091 per square foot! The reasons for California’s high costs, developers and housing experts say, begin with the state’s high price of land and labor. For the average San Francisco construction laborer, the mean wage is nearly 50% higher than the national average ($32.54/hr. compared to the national wage of $21.52. Source: BLS). And depending upon expertise and experience, cost of insurance and the high demand for skilled labor in the Bay Area, these costs often grow much higher.
Overall, three key trends continue to drive up the Bay Area’s construction hard costs: rising material costs, a labor shortage, high cost of living, and a surge in demand for housing. Then, factor in city fees, labor mandates, insurance, and the slow permitting process to the equation, and, well, you get the picture.
In certain parts of the country, factors like colder climates can add an extra layer to the construction process, as well as costs. For example, the addition of insulation and a durable roofing system that can withstand the harsh weather might be necessary.
Fluctuations in the supply chain during the pandemic also inflated the cost of materials, shipping, and project scheduling. The inflation of crucial building materials like softwood lumber, steel, aluminum, and other imported materials is increasing costs and harming housing affordability. And, even in this post-pandemic period there are oligopolistic pricing practices going on, known as Greedflation. These are endemic in a lot of industries where COVID-19 certainly provided cover for raising prices. While shipping, input prices, and cost of manufacturing have eased, if prices are still high among your suppliers, this may be what is going on.
Photo: Avel Chuklanov
II: Soft costs
Soft costs, which account for 25% of the total, are unfixed and include non-physical tasks like financing, permits, inspections, design work, and other administrative tasks. (More on how to curb these cost, below.)
III: Land Costs
The third major cost of building a new house is the cost of the land, accounting for, on average, 18% of the cost of a new home. While land is generally a relatively small share of U.S. housing costs for most Americans, land values can vary substantially based on local market conditions. For example, in San Francisco, a small yet dense urban area, land costs can reach up to 70% of the value of a potential house, compared to just 28% for the median U.S. home. The reason behind San Francisco’s competitive market is likely the city’s beautiful views, booming tech, industry, culture diversity, and proximity to excellent education, but also supply restrictions and zoning regulations drive up the cost of land relative to construction.
Three: Land cost
How to cut down on hard costs
There are a few ways to reduce hard costs in the short and long run. The easiest way is to cut down on unnecessary construction. Can something be remodeled instead of demolished and rebuilt? Can we design smaller, more efficient homes and opt for less complex design features and ornamentation? These can minimize resource consumption, waste, and, therefore, total cost.
Consider recycled materials or renewable resources that are easier on the environment and often the wallet. Purchasing materials from overstock suppliers or buying architectural and building materials from local salvage yards saves money. There are online platforms specializing in keeping materials in circulation, like Rheaply, that may give you broader access to just what you need at a fraction of the cost and time. Reusing material can be significantly cheaper than the cost of new materials, not to mention reducing your project’s carbon footprint. It may mean changing a spec, but if it reduces material costs by 30 or even 50% for that material, it could just be worth it.
Another option is to explore alternative building methods like Passive House design. While they may be more expensive to construct, they will reap savings over the lifespan of the home, as Passive Houses generally use 90% less energy to operate than conventional homes. Deferred savings should not be overlooked.
Cutting down on soft costs
One way of reducing soft costs is to minimize the time spent doing administrative tasks. Taking more time to finalize the house design, triple-check the number of materials to order (overages are often excessive and another source of extraneous cost, not to mention waste). Getting agreement from all stakeholders before the build process starts and being in close communication with your project team throughout the process can reduce errors, last-minute changes, and unnecessary construction. Change orders account for 30% of all construction and are a significant source of unnecessary waste. These are things that are more often than not within your control and will reduce your costs.
Being smart about land costs
Land costs are tricky to reduce but look for ways to maximize the property’s value and reduce overall costs with some strategic planning and creative thinking on the hard costs side. Framing and foundations are the two dominating hard costs, which is why the most effective way to reduce your overall housing cost is to minimize square footage, whether limiting the overall size of your house or strategically building upwards in a two-story design rather than outward. Be creative with space planning and incorporate multi-purpose spaces into the design. Another way to curtail the amount spent on the high cost of pouring foundations is to remodel a home and build on an existing foundation rather than starting anew. Spend the savings on high-end furnishings!
Embrace the idea of Small(er)
If you live in expensive, densely populated areas like New York City or San Francisco, efficient design and beautifully appointed interiors may be even more important to you. Even if you don’t live in high-cost areas, building smaller also reduces your operational and maintenance costs, which in turn saves you money in the long run, so you can surround yourself with what gives you pleasure and enjoy life.
Summing it all up: know your costs.
Housing costs come from various factors, and in most cases, the most significant expense when constructing or buying an existing house is building the house itself. Land costs become a more significant factor when entering dense urban areas, where land restrictions exist, but efficient and creative building strategies can reduce those costs. Careful planning, good communication, and doing the research on sourcing are steps to saving money in the process of building or renovating. Employing these smart strategies will keep you one step ahead of the costs and one step closer to enjoying your new home.
Sources:
- California/SF Bay Area labor wages vs. U.S, Bureau of Labor Statistics (BLS) Occupational Employment and Wages, May 2022: Construction Laborers; And Salary. com/Construction Laborer Salary.
- https://www.nahb.org/subsites/log-homes/buyers-guide/budget-and-financing-pages/8-strategies-for-reducing-construction-costs
- https://www.knack.com/blog/how-to-reduce-construction-costs-for-projects/
- https://blog.naiop.org/2023/12/how-rising-construction-costs-are-impacting-real-estate-development/
- https://www.acebuildingservice.com/blog/understanding-the-difference-between-hard-and-soft-costs-in-construction
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