Home Prices and Construction Costs
Written by Bill Russell   
07.02.2007
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Previously, I looked for variables that explain home appreciation. Today I want to put forth one factor that I am certain cannot explain it: construction costs. There are some interesting papers on this topic (one of the best can be found on the National Bureau of Economic Research website), but I think I can prove my case pretty simply.

I began with a good home price index produced by the OFHEO. Although there is no official home construction price index, the BLS provides price index data on most of the components necessary to build one. Using this BLS data, I built a construction cost index, containing the price of lumber, concrete, copper, gypsum, and roofing materials. I also included an average wage rate from the Social Security Administration. The results can be seen below.



According to the OFHEO, home prices have increased by a factor of 3.9 since 1980. In the same time, the construction cost index increased by a factor of only 2.6. For comparison, the CPI has increased by a factor 2.3, roughly the same amount as the construction cost index. In real terms, the cost of constructing a home hasn’t really changed much in the last 27 years, while home prices, in real terms, have doubled.

Home prices have clearly not been pushed up by construction costs. This means that if you want to explain home appreciation and address the problem of affordability, you have to look elsewhere.
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