HousingEconomics.com Resources
Cost of Constructing a Home

Special Studies, January 2, 2014
By Heather Taylor
Economics and Housing Policy
National Association of Home Builders
 
Report available to the public as a courtesy of HousingEconomics.com 
 

Introduction

Over the years, NAHB has periodically conducted “construction cost surveys” to collect information from builders on the various components that go into the price of a typical single-family home. NAHB’s most recent construction cost survey (conducted in August and September of 2013) shows that although lot sizes are shrinking, both the cost and size of the home are on the rise. The average home in our survey was built on 14,359 square feet (about a third of an acre) of land, had 2,607 square feet of finished area, and sold for $399,532. The average share of the home’s sales price which goes to construction cost jumped from 59 percent in both 2009 and 2011 to 62 percent in 2013. Finished lot costs, accounting for the second largest share of the sales price, dropped from 22 percent in 2011 to 19 percent in 2013. Builder profits account for, on average, 9.3 percent of the sales price. The following sections describe the methodology of the survey and discuss the results in more detail.

Methodology

NAHB’s 2013 construction cost survey was conducted by emailing a questionnaire to a representative sample of 3,019 home builders. The sample was stratified by size of the builder (based on number of starts) and region of the country (the sample being proportional to housing starts in each of the four principal Census regions).

Over the years NAHB has modified the survey and its methodology. In 2009, the survey methodology changed to provide a better, more representative sample of single-family construction across the country. In 2013, NAHB developed a different construction cost breakdown that more closely resembles the steps which builders take when building a home. Prior to 2013, the breakdown had 29 sections. In 2013, we created eight subcategories for each of the major stages of construction, with a total of 36 sections grouped under the appropriate construction stage. The new format simplified data collection, greatly reducing the number of follow-up calls needed to clarify and verify builder responses.

Respondents were asked to provide information about the average home built by their firms during 2013. Usable responses were received from 39 builders. Table 1 shows the detailed results of the 2013 construction cost survey.

Table 1. Single Family Price and Cost Breakdown - 2013 Results

These results are national averages; the survey sample is not large enough for a geographic breakdown. Building practices, the cost of labor, the cost of land, and to some extent the cost of the materials can vary from place to place and depend on the nature of the particular home being built. Although the NAHB construction cost survey can provide a broad idea of construction costs for an average home, it is not a perfect tool for estimating costs for a particular house. Companies that provide more specific cost estimating, usually for a fee, include RSMeans and Marshall & Swift. The costs include all the costs paid by a builder that go into a particular item, including labor costs paid directly by the general contractor, the cost of hiring subcontractors, and the cost of materials however they are purchased.

Home Size and Lot

The average size of the home in the 2013 construction cost survey was 2,607 square feet, which is about 300 square feet more than the average size of the homes reported in the 2011 construction cost survey, but still about 100 square feet less than the peak reported in the 2009survey. The Census Bureau’s “Characteristics of New Single-Family Homes Completed” contains annual data on the floor area of a single-family home. According to the Census Bureau’s annual report, the average floor area of single-family homes completed followed a pattern similar to that of our respondents. The average floor area peaked at 2,521 square feet in 2007, followed by a steady decrease to 2,392 square feet in 2010, and subsequent increase to 2,505 square feet in 2012. According to a recent NAHB study on the Characteristics of Home Buyers, first-time home buyers purchase smaller homes, on average, than trade-up buyers. In recent years, tighter underwriting standards have eliminated some first-time home buyers from the market. This could explain the increase in average home size.

The average lot size in the 2013 construction cost survey was 14,359 square feet—about a third of an acre (14,520 square feet). The average lot size has declined from about half an acre (21,780 square feet) in both 2009 and 2011 (21,879 square feet, and 20,614 square feet, respectively). The Census Bureau’s data on new residential construction shows that the average lot size for new homes sold peaked at 18,433 square feet in 2008, and hit a two decade long low of 15,634 square feet in 2012. In recent years, lots have been harder for builders to acquire. Responding to special questions on the survey for the NAHB/Wells Fargo Housing Market Index in August 2013, 59 percent of builders reported that the supply of lots in their markets was low or very low—up from 43 percent in September of 2012, and the largest low supply percentage since NAHB began periodically asking builders the question in 1997. The low supply of lots could be driving up lot costs. Lot costs were $3.5 per square foot and $3.3 per square foot in 2009 and 2011, respectively, but $5.2 per square foot in 2013.

Sales Price

The average price of the new single-family home in the 2013 construction cost survey was $399,532, up more than 25 percent from $310,619 in 2011, but still below the peak of $454,906 in 2007. The Census Bureau’s data on new residential construction follows a similar pattern for the average sales price of a single-family home sold. According to the Census Bureau, the average sales price peaked at $313,600 in 2007, hit a post 2007 low of $267,900 in 2011, and then increased to $292,200 in 2012.

Respondents were asked to breakdown the sales price of an average single-family home built by their firm into seven categories: finished lot cost; total construction cost; financing cost; overhead and general expenses; marketing costs; sales commission; and profit. Table 2 contains historical information on the sales price breakdown of a single-family home. The total construction cost of a home accounts for 61.7 percent of the sales price in 2013. Although the cost of constructing a home always accounts for the biggest share of sales price, this is the highest the share has been since 1995. Higher construction costs could contribute to the jump in total sales price. Finished lot costs always capture the second largest share of the sales price, but at only 18.6 percent, is at an all time low. This drop can be attributed to smaller lots, as discussed in the previous section.

Table 2 also shows that builder profits are beginning to rebound. Builders were instructed that the seven items in the table should sum to the total sales price, so profit is essentially the residual of the price minus the other six items. Builders were not given a specific definition of profit beyond that.

Table 2. Single-Family Homes Sales Price Breakdown History

As shown in the table, profits hit an all time low of 6.8 percent in 2011, but have rebounded to 9.3 percent in 2013. During the down turn many builders had to tighten their budgets. Although homes are beginning to sell, and prices are beginning to rise, builders remain very cautious. This could be why overhead and general expenses, which were 5.4 percent and 5.2 percent of the sales price in 2009 and 2011 respectively, hit an all time low of 4.3 percent in 2013. The remainder of the sales price is divided between overhead sales commission (3.6 percent), financing cost (1.4 percent) and marketing cost (1.1 percent). Each of these shares is similar to the breakdown in 2011.

In addition to the Construction Cost survey, NAHB’s Business Management Department sponsors the Builders’ Cost of Doing Business (CODB) survey in even numbered years. The CODB is based on the income statements for a firm, rather than the price of an average house. Although the surveys are not perfectly comparable, the sales price breakdown in the Cost of Construction Survey is generally consistent with the results of the CODB. Table 3 contains the comparable parts of the Cost of Construction Survey and the Cost of Doing Business Survey. One noticeable difference is between the Cost of Construction’s profit (9.3 percent) and the sum of CODB owner’s compensation and net income before taxes (5.7 percent). Profit in the construction cost survey is based on an average single-family home built by the firm, whereas the net income share in the CODB is a percentage of the firm’s total annual revenue and therefore takes into account all the homes built by the firm, both sold and unsold.

Table 3. 2013 Construction Cost Survey vs. 2012 Cost of Doing Business Survey

Construction Cost

The average construction cost of a single-family home in the 2013 survey is $246,453. This average is significantly higher than the 2011 average construction cost of $184,125, and is the highest it has been since 1998. Although the cost of construction per square foot remained relatively stable in 2009 and 2011 ($82 per square foot, and $80 per square foot, respectively), it jumped to $95 per square foot in 2013. Since framing and trusses always account for the largest share of construction costs, this is potentially the result of increasing lumber costs. The share of construction costs going to framing and trusses jumped from 13.5 percent in 2011 to 17.0 percent in 2013. The price per square foot of framing and trusses increased from $11 per square foot in 2011 ($24,904 average cost of framing and trusses divided by 2,311 square feet of average finished area) to $16 per square foot in 2013 ($36,438 average cost of framing plus $5,461 average cost of trusses divided by 2,607 square feet of average finished area). NAHB builders have been reporting increases in the cost of lumber. Responding to special questions on the survey for the NAHB/Wells Fargo Housing Market Index (HMI) in May 2013, 80 percent of builders reported that the price of trusses has increased over the last 6 months, and 92 percent reported that the price of framing lumber increased over the last 6 months. According to the Bureau of Labor Statistics’ Producer Price Index the cost of softwood lumber increased 22 percent between September 2011, and September 2013, and 40 percent between April 2011, and April 2013. Many of NAHB builders have also run into labor shortages. Responding to special questions on the HMI given in March 2013, framing crews are the least available of all types of labor needed to construct a home—48 percent of builders reported a shortage of framing crews (directly employed by their firm), and 51 percent report a shortage of subcontractor framing crews. The rising cost of construction can be attributed to both the increase in price of lumber and the shortage of framing crews.

This year we broke the cost of construction into 8 major stages of construction. Interior finishes, at 29.3 percent, accounts for the largest share of construction costs, followed by framing (19.1 percent), exterior finishes (14.4 percent), major system rough-ins (13.4 percent), foundations (9.5 percent), site work (6.8 percent), final steps (6.6 percent), and other costs (0.9 percent). See Table 1 for a full breakdown.

Although there were major changes to the construction cost breakdown in 2013, some of the categories either remained the same or were similar to past years. In Table 4 the previous year’s category title is captured in parentheses next to 2013’s title. If there is nothing in parentheses, the titles are identical.

Table 4. Single-Family Construction Cost Breakdown History

For more information about this item, please contact Heather Taylor at 800-368-5242 x8503 or via email at htaylor@nahb.org.


Recommend This: Recommend This