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Past 5 Years Increase In Regulatory Costs Associated with New Homes Nearly Five Times Higher Than Increase In CPI

The median price of a new home in the U.S. in 2011 was $227,200 and this year, thus far, the median price is $288,000, an increase of 26.7 percent in that five-year period, according to data from the U.S. Census Bureau.  During this same period, the Consumer Price Index (CPI), as the chart below illustrates, rose just 6.1%.  So why did the median price of new homes during this period rise over 4 times as much as the rate of inflation?

What is driving new home prices up?

The two major components to the cost of a new home are construction cost and finished lot cost.  Presently, according to the National Association of Home Builders (NAHB), 61.8% of the price of a new home is construction cost and 18.2% is attributable to the cost of a finished lot.   Both of these costs, which account for about 80% of the cost of a new home, have been severely impacted by costs associated with every increasing government regulations.  In fact, as the chart below shows, regulatory costs for a new home increased almost 30 percent (29.8%) from 2011 to 2016 while, as I mentioned previously, CPI only increased 6.1%.

What about builder profit margins, are they to blame for higher prices?

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After suffering through the new home depression that began in 2008 builders would like to be making fat profit margins now to try to recoup some of the lost revenues from the last several years but the reality is the current average profit margin (according to the NAHB) of 9.0% is less than the historical average.  For example, in 2007 builders realized, on average, a profit margin of 11.2% and even 18 years ago, back in 1998, the profit margin was higher, at 9.2%.

 

Increase in Regulatory Costs Associated With New Homes 2011-2016

Source: National Association of Home Builders

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