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Rising Construction Costs Could Offer Offset to Softening Real Estate Market But Could Hurt Affordable Housing.
Rising construction costs could offer a long-term offset or buffer to the softening real estate market and falling home prices.
Housing prices have more than doubled in most regions, but construction costs have risen as well. In many instances material costs have doubled and even tripled, so it may cost twice as much to build that house as compared to what it might have costs ten years ago.
If the median and average selling price of a home continues to decline, then construction of new homes will fall dramatically. Why? Because rising construction costs and falling housing prices will squeeze builder’s gross profit margins forcing them to postpone many future projects.
Subsequently, demand for housing at certain price points which allow builders to earn a reasonable profit will have to catch up with supply before builders resume development. This theoretically would keep the supply of housing in check, thus dampening the possible fall in prices.
This may offer some comfort for those who already own a home and fear how low prices might fall, but it won’t help those who already can not afford to buy a home of their own. Rising construction costs ultimately put a damper on any efforts to provide affordable housing. There are a lot of potential home buyers that might create demand for housing at various lower price points. But the market may never get to those lower price points. Construction costs could just remain too high and other market conditions alone may never create enough affordable housing.
So it is not a lack of demand for housing that is putting a damper on the real estate market, but a lack of demand at current prices that is putting a damper on the real estate market. There is plenty of demand for housing; just for more affordable housing.
Please note that there are many other variables that affect the housing market, such as 1) interest rates, 2) inflation, 3) expenses associated with maintaining a home, 4) economic growth, 5) employment, 6) supply versus demand and 7) general public sentiment.
About the Author: I have twenty years experience in the financial services industry with specific experience in financial statement preparation, risk management, financial modeling of interest rate derivative products, and forecast modeling. My forecast modeling experience would relate to financial statement analysis and new product line optimization.