Construction Cost Inflation: Why New Housing Starts Are Stalling

If you are looking for a newly built home or waiting for a development project to finish in your neighborhood, you might have noticed a slowdown. Cranes are sitting idle and foundations are being poured at a much slower rate than they were two years ago. While high mortgage rates for buyers get most of the headlines, the supply side of the equation is facing a massive hurdle: the skyrocketing cost to actually build a house.

The Reality of Building Material Prices

For builders, the math simply isn’t working the way it used to. The Producer Price Index (PPI) for construction materials has remained stubbornly high even as broader inflation cools. When a developer estimates a project, they are looking at the hard costs of materials. If those costs exceed the price they can reasonably sell the home for, the project gets canceled or paused.

The Concrete and Cement Problem

While lumber prices have stabilized after their chaotic peaks in 2021 and 2022, other essential materials continue to climb. Ready-mix concrete is a prime example. Prices for concrete have risen consistently over the last 18 months. This is largely due to shortages in sand and cement, as well as the high energy costs required to produce them. You cannot build a foundation without concrete, meaning the very first step of construction is now significantly more expensive.

The “Finishing” Inflation

The cost of the “shell” of the house is one thing, but the components inside are another.

• HVAC Systems: New energy regulations (SEER2 standards) introduced recently have forced builders to install more expensive, higher-efficiency units.
• Electrical Switchgear: Lead times for electrical components can now extend to 60 or even 80 weeks. This forces builders to order parts more than a year in advance, tying up capital and increasing risk.
• Drywall and Glass: Energy-intensive manufacturing processes have kept prices for gypsum products and window glass elevated.

The Labor Crisis: Missing Workers

Material costs are only half the battle. The construction industry is facing a severe demographic cliff. According to the Associated Builders and Contractors (ABC), the industry needs to attract over 500,000 additional workers on top of the normal pace of hiring just to meet current demand.

This shortage has two main effects on housing starts:

1. Higher Wages: To attract skilled electricians, plumbers, and framers, construction firms have to pay significantly higher wages. These labor costs are passed directly into the price of the home.
2. Longer Timelines: Because there aren’t enough crews to go around, scheduling becomes a nightmare. A job that used to take six months might now take nine because the drywall crew is booked solid for weeks. Time is money in construction because builders are paying interest on their loans every day the project sits unfinished.

Financing: The Invisible Cost

When we talk about inflation, we usually mean the price of goods. However, the “cost of money” is a major factor for construction companies. Most builders do not pay cash to build a subdivision. They take out Acquisition, Development, and Construction (AD&C) loans.

These loans usually have floating interest rates that track with the Federal Reserve’s benchmarks. When rates are high, the interest payments on a construction loan can eat up a builder’s entire profit margin.

This has caused a specific slowdown in the multi-family sector (apartments and condos). During the pandemic, there was a boom in apartment construction. Now, banks are tightening their lending standards. They are worried about oversupply in certain markets like the Sun Belt, so they are hesitant to lend to developers. Without easy access to credit, developers cannot break ground.

How This Impacts the Housing Market

The combination of expensive materials, scarce labor, and high-interest loans creates a difficult environment for new housing starts.

The “Pencil” Test

In developer jargon, a project has to “pencil out.” This means the projected sale price must cover the land, materials, labor, loan interest, and a safety margin for profit. Right now, because costs are so high, many projects simply do not pencil out. Builders are choosing to sit on the land and wait for costs to drop rather than building at a loss.

Inventory Constraints

This slowdown in starts guarantees that housing inventory will remain tight for the foreseeable future. Even if mortgage rates for buyers drop, there may not be enough new homes to meet demand. This lack of supply acts as a floor for home prices, preventing them from falling significantly even when demand is weak.

Shift to Lower Specs

To combat costs, some national builders are shifting their strategy. Instead of building larger, custom-feel homes, they are building smaller footprints with fewer amenities. You might see fewer three-car garages, simpler rooflines, and standard laminate countertops instead of quartz, all in an effort to keep the final price attainable for buyers.

Frequently Asked Questions

Why are concrete prices still going up? Concrete production is energy-intensive and relies on raw materials like sand and limestone, which are becoming harder to source near major metro areas. Additionally, a lack of truck drivers to transport the heavy material keeps prices elevated.

Will construction costs go down in 2025? It is unlikely that costs will drop significantly. While some commodities like lumber fluctuate, the cost of labor and finished goods (like windows and HVAC units) tends to be “sticky.” They rarely go down once they have gone up; they simply stop rising as fast.

How does the labor shortage affect me as a buyer? The labor shortage means homes take longer to build. If you sign a contract for a new build, be prepared for potential delays. It also ensures that home prices cannot drop below a certain level, as the baseline cost to employ the workers remains high.

Are all types of construction slowing down? Single-family construction has remained somewhat resilient because there is still demand from buyers. However, multi-family construction (apartments) has seen a sharper decline due to financing difficulties and a large supply of units currently hitting the market from projects started two years ago.