The National Apartment Association will be publishing an in-depth article and blog post on rising construction input costs, but in the meantime, they offered us some basic data comparing the Producer Price Index (not seasonally adjusted) in May 2018 vs. May 2017:
Over the past year prices for lumber have skyrocketed and that has put added pressure on homebuilders and apartment developers alike. From an article in the Wall Street Journal:
The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house.
The historic run-up in lumber prices–attributable to a trade dispute with Canada, wildfires and limited rail capacity–comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor…
For a generation setting off to start families in the suburbs, pricier construction materials are another hurdle to homeownership, on top of rising borrowing costs and competition from institutional investors, who are gobbling up homes to turn into rentals in some of the country’s hottest markets.
Apartment developers are also facing skyrocketing costs and, according to several who are members of PTAA, it’s affecting their ability to do deals. One said in an email exchange that his company has passed on several otherwise good projects because cost far outpaces rental rate.
This news is not good for housing affordability either. We’re already seeing an imbalance between supply and demand which will only be exacerbated by higher costs and suppressed development. Until development can catch up with demand it’s hard to see a way in which the affordability question can be answered.
In a Wall Street Journal article about San Francisco’s tight housing market the authors look at how the city government has contributed to the problem:
San Francisco’s plodding construction pace has added to the shortage. In most major cities, there are few legislative or permitting hurdles to developments that don’t require major zoning changes. Here, even projects with a handful of units are subject to a legislative and appeals process that can take years—raising the cost of housing.
Mr. Erickson, the developer, estimates it costs $650,000 to build an 800-square-foot unit in a midrise building, and as much as $100,000 of that can be chalked up to the elongated pace of construction. “Every single [building] permit is subject to discretionary review,” Mr. Erickson said. Because of that process, he said, “anybody can fight” any development.
Supervisor Scott Wiener, whose district includes many transit-heavy neighborhoods that are popular with young technology workers, has pushed to cut down on delays tied to the appeals process. His proposal to curb the city’s environmental-appeals process to 30 days after approval was signed into law last July.