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Rising Construction, Labor Costs Increase Rents, Contributing to the Affordable Housing Crisis

Published by Peter Lawrence on Wednesday, February 23, 2022 - 12:00AM

High costs of construction materials, driven by supply-chain challenges and other factors such as labor shortages, have resulted in increased rents and home prices. In fact, these high construction costs are one of the reasons why housing affordability is near a 10-year low. Expanding the low-income housing tax credit (LIHTC) and creating new tax incentives like the Neighborhood Homes Tax Credit (NHTC)–as proposed in the Build Back Better Act (BBBA)–could help build more affordable housing, and substantially increasing supply could  help drive housing costs down.

For many years the inability of the nation’s housing supply to meet demand has driven up the cost of housing. More recently, increases in construction costs started to affect development, slowing the pace of building as well as increasing costs for households in the form of higher rents and home prices, which have been a primary driver of inflation.  

According to the National Association of Home Builders (NAHB), the costs of building materials is up 20.3% in early 2022 compared to a year earlier. According to the Harvard Joint Center for Housing Studies, the costs of construction materials and labor have been increasing over the past two decades, doubling between 2001 and 2019, and increasing by 9% from 2020 to 2021 alone. These high costs have been exacerbated by the limited supply of homes. As in June 2021 there were 23% fewer homes for sale than the previous year.

The NAHB reported that there was a 0.8% decrease in the construction of multifamily homes and estimated that the current annual pace of building multifamily homes is 522,000 homes. They also reported a 8.3% decrease in multifamily building permits in January 2022. Further, fewer homes are being started. For both single and multifamily new home starts, there have been 37.7% fewer new starts in the Midwest and 2.0% fewer new starts in the South compared to January 2022. However, there were some increases in the Northeast and West.

Only 54.2% of new and existing homes sold during the fourth quarter of 2021 were affordable for households earning the U.S. median income of $79,900, only slightly lower than during the third quarter when 56.6% of homes sold were not affordable. The national median home price rose to $360,000 in the fourth quarter of 2021, up $40,000 from the first quarter of 2021. The NAHB also predicts, like many others, that the Federal Reserve will probably be raising interest rates in March, making it more difficult to purchase a home, thus putting further strain on the rental market by putting homeownership out of reach for some potential homebuyers, who will then continue to rent. This could push rents higher. Rents rose an average of 11% in September 2021 year over year.

Increasing Costs of Materials, Labor Shortages Mean Higher Housing Costs

The NAHB looked to the Producer Price Index (PPI) to determine how much the cost of building materials has increased throughout the course of the COVID-19 pandemic. While the pandemic has exacerbated the costs for materials and labor in a short period of time, these issues were present before the pandemic.

Construction Materials

The price of framing lumber rose in both 2020 and 2021, as it averaged about $550 per thousand board feet in 2020 and almost $850 in 2021, both of which were new annual records. In 2021, the price of lumber was 17% higher than its 25-year average and the high demand for housing has helped to fuel these price increases.

The Bureau of Labor Statistics released the January 2022 PPI, and the NAHB detailed the PPI changes of common construction materials. These PPI changes can be seen in the graph below:

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The graph below shows the percent change in PPI for general construction materials from August 2021 to January 2022:

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The shortage of construction workers has both increased construction costs and extended construction times, and by extension contributed to the higher costs of homes. In recent surveys, many builders reported that they were concerned with the cost and availability of labor and this concern has been mostly increasing since 2011, as seen in the graph below. While this concern decreased by 22% from 2019 to 2020, it has since risen with 85% of the surveyed builders reporting the cost and availability of labor to be a concern for 2022.

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Labor shortages are a persistent problem. The NAHB, citing figures from the Home Builders Institute, reported in The Washington Post that there are about 400,000 open construction positions and that 740,000 workers need to be added to the this industry per year, or 61,000 workers per month, to account for growth of the industry and retirements. Without sufficient labor, the costs of homes will continue to remain high and potentially increase further as construction timelines are extended.

Without Policy Intervention, the Affordable Housing Crisis Will Continue

The NAHB has predicted what could happen if the costs of building materials continue to rise unsustainably and the supply-chain issues are not addressed:

  • New home starts may decrease because builders will not know when they can economically and sustainably start a new development.
  • The current pipeline of home constructions could be delayed if builders can’t receive materials in a timely manner.
  • Fewer households could be able to purchase a home because they will no longer be able to afford to do so. Households who do have the funds to purchase a home may not be able to do so because there will be a lack of supply. Both scenarios will put strain on the rental market.
  • Home appraisals could no longer be accurate because these appraisals will reflect the current economic situation instead of a home’s true value.

The NAHB has stated that policymakers must make addressing supply-chain challenges a priority, otherwise construction costs will continue to rise, thus forcing the cost of housing to rise for consumers. The NHTC could help to finance affordable homes and address some of these concerns. More details about this tax incentive and how it can finance more affordable homes can be found in the previous Notes from Novogradac post.

Expanding tax incentives, including the LIHTC, would also help build more affordable housing. The LIHTC could finance 819,900 affordable homes if the incentive’s provisions in the BBBA were to be passed. Passing This would be an important step in increasing the supply of housing, which would help meet demand and–combined with solutions for current supply chain challenges–bring housing prices down.

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