Why Is Housing So Expensive? We Explore Ways To Cut Costs

11/07/2017

Cost challenges were the most pervasive topic discussed throughout the ULI fall meeting in Los Angeles last month. The resounding sentiment was that the homebuilding industry needs to be proactive to combat today’s rising costs. It wasn’t until we tied in the insights from Tim Costello, the CEO of BDX, that we realized this step will set certain companies apart from the rest. Tim insisted that we need to recognize that progress is better than perfection and companies must keep innovating since disruption is around every corner. Our Manager of Housing Economics, Ali Wolf, briefly explored how builders can embrace this strategy to alleviate its growing cost conundrum.

PROBLEM: THE COST OF LABOR

Construction employment peaked around 7.7 million workers and hit bottom around 5.5 million in 2011. Six years later, construction employment is still 10% below that 7.7 million workers mark. We aren’t building as many homes as in the mid-2000s (total permits are down 17% from 2005) so we don’t need to get back to peak levels, but we are still facing a severe shortage, especially in technical trades. Just look around your company, we bet many of your most-skilled workers are being recruited and receiving new job offers with compensation mirroring that of the last cycle (or maybe more).

The average construction wage countrywide is up 11% since 2010. That difference is more stark in high demand markets and for specific trades (framers in California, for example). The cost of labor was already an industry-wide problem before the hurricanes in Texas and Florida and the fires in California, and these natural disasters are exacerbating the labor shortage as homeowners look to rebuild their homes or recover from the damage.

 

POSSIBLE SOLUTION: WELCOMING TECHNOLOGY

We encourage and applaud the efforts made in the industry to help educate the younger generations through programs in high school and trade schools. Those concerted efforts will help attract more young people to the industry, especially as rising construction incomes become competitive with wages in other industries. Outside of education, there are additional opportunities our industry can consider to bring down the cost of labor.

Here are a few real-life examples we’ve seen:

  • Prefab Housing. This type of housing has been around for years, but not to the level we are seeing today. Companies like Entekra provide fully integrated off-site solutions to builders with homes built in a factory and assembled on-site. These homes have no design restrictions and can typically be delivered quicker than traditional building methods.
  • Streamlined Production. We spoke with a supplier that added technology to their production in-house. Their biggest hesitation was the upfront investment. Six months after using the equipment, the company is more efficient and working with fewer employees. The efficiency gain helps offset the cost, while the remaining employees are happier because the employer was able to bump their pay.
  • Artificial Intelligence (AI). For office jobs, we met with a company last week that replaced some of their analysts with AI. AI can help with mundane and repeatable tasks, as well as more complicated work. Think about the added benefits AI could provide during your land acquisition strategy.
We recently covered these topics in a white paper for our clients and are constantly learning about new ways to improve workflow. Please contact us to discuss how we can help you explore cost-cutting solutions.
Ali Wolf, Manager of Housing Economics
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