The Expert Podcast

So how much have building costs gone up really? Here are some actual hard numbers, and what it can do to the ultimate selling price or build price of a house. Here's an article from the New York Post, which features some Instagram model—I'm not sure who this is—but they talk about their build on their dream house and how much it went up in cost. They get into some hard numbers, which kind of match what we're seeing in the construction industry. Some of the numbers don't add up to the total of what they're saying for a three million dollar house, but let's just take a look and see what some of the numbers are.

First, look at the timeline. The person bought a Lakefront lot of land for $260,000, and their goal was to build a three million dollar castle house. They started building it in 2020, which was two years ago, but four years later, the house still isn't done. Now, here's the thing: we know in Texas it takes a lot less time to build a house. In other states, we've seen subdivisions where it went from an empty lot to a finished house with a Certificate of Occupancy (CO) within three months, within 90 days. It may not have been as complicated a house as this one, but we've seen houses go up very quickly. In fact, there was a commercial property we always laughed about where they built a drive-through Chick-fil-A restaurant in 33 days, from the time it was a graded lot to opening the door. Thirty-three days—you can build houses fast. So, four years is a problem.

The first thing is that they took out an extra $100,000 loan for unexpected costs. Well, what are the costs? They talk about supply chain issues where they couldn't even get some of the things they wanted. But then, when it comes to cost, let's just take a look. Instagram model, okay, I get it. So, here's one: their initial budget for lumber was $105,000. As of last month, the budget was already $177,000. That's about 60 or 70 percent higher. That's what we've seen in construction costs for lumber—just for the lumber package.

But my question is this: how much of the whole house are we talking about? It looks like from the pictures, this house is substantially complete for framing, so all the lumber should be in there. So, $177,000—if that's complete, that doesn't add up to be a three million dollar house. Lumber should be about a third of the total price of the house. So, for a three million dollar house, lumber should be a million or maybe even a little bit less. $177,000 doesn't make sense. Maybe this is only part of the lumber bill, or maybe something else is going on. But the bottom line is that they're saying their budget is 70 percent higher. Maybe they're going to spend more, but 70 percent is about correct for lumber.

But that's not the only cost that goes into a house. They also talk about a certain type of stone they were using for architectural features. They had budgeted $27,500, but now they've spent almost $40,000. There were delays as it came from a quarry in Oklahoma, but that's part of the supply chain problem. Let's talk about appliances. For appliances, they had a budget of $65,000. Well, that went up to $78,000. That's actually pretty good. A lot of appliances we've seen almost have doubled for appliance packages, so they didn't get hit that much on the house. But even if you add those things up, obviously, there's more cost that goes into a house—there’s labor, finishings, furnishings, site work, landscaping. But even if you add these things up, it doesn't seem like it adds up to be a three million dollar house. I could be wrong, but there’s probably more to it than meets the eye.

It may be that it's going to cost them $800,000 or $900,000 to build the house, and they think it's going to be a three million dollar house in value. That could be the case, but it's not a house that costs three million dollars to build, even looking at the photos of it.

So, what does that mean? Well, supply chain issues are still in existence. We're still running into delays in some items, especially adhesives and some interior finishes. The lumber price has stabilized a little bit. It's still running about $600 to $620 for a thousand board feet, which is definitely half of what it was a year ago, but it's well above—it’s double what it was two or three years ago. Is it going to go up or down? It's probably going to stay about that. We’ve talked about it before: lumber should be staying between $550 and $750, maybe touching $800, but it should have a narrower trading range than it had before.

They also have now a new commodity purchase opportunity where you can buy truckloads instead of train loads, which will make it easier for liquid markets.

The big question is home construction. Well, if you're building a house for yourself—not speculation—it’s a little bit different than builders constructing a spec neighborhood, because the builder's now on the hook until they sell that house. The housing market is still in question. We believe it’s still going to be strong once the dust settles, but right now, builders are not putting their neck out on the line to build spec houses in a speculative neighborhood, because you don’t know if you’re going to sell the house. If your money’s out there, your budget, your finances could be at risk.

So, if it's a self-build or a client commissions you to build the house for them to live in and they have the money and you're getting drop payments—that’s a different story. You're not really hanging yourself out to dry on finances. But if you're a builder that says, “I'm going to build a house and then sell it,” you know, at the cost of lumber, materials, and labor, right now, you may not be able to recoup your investment. In fact, we watched a video this week, which was a flashback of one of the first episodes of This Old House. Remember Norm Abram and Bob Vila back in the 1980s? They bought a house to rehab and fix up and sell. This house was in Dorchester, Massachusetts. They paid $17,000 for the house and put another $42,000 into it. You might say that’s cheap, and it was a nice house too. But when they finished, they sold it for $38,000. So, they lost money on it.

Now, they developed a TV show and went on to make millions, had a big following, so that’s not the point. But it does show you that it’s possible to build, construct, or rehab a house and not get your money back. You have to be very careful with your budget on construction—whether it’s a rehab, addition, remodel, or building a new house. It's not automatic that you’re going to get your money back. You have to be very careful with the budget, knowing your market, knowing how big a house to build. You don’t want to build too big; you don’t want to build too small; you don’t want to overbuild with high-end furnishings that you won’t be able to recoup. But you also don’t want to just build a grade on a 5,000-square-foot house either. You have to know what you're doing, and you have to have a timeline.

The longer you sit with that house, the more fixed costs accrue to that house. The more interest and carrying costs accrue to that house. If you can knock out a house in five or six months, get it built and sold, boom—you don’t have too many carrying costs, and your market is not going to fluctuate too much. If you sit on a house like these people for two or three years, you have no idea what your construction costs are going to be. Your delays cost you money, plus all your fixed costs for your construction company—your office, your insurance, your rent, electricity, overhead, executive pay. Now, you have 22 months of that added to your expenses instead of eight months. Fixed costs are an important thing to amortize into the construction budget.

Whether you're pricing out a project for a client, you're building a house for a client, or you're building a spec home, you want to factor that in because it's real money you’re paying. It’s not just magic money that goes away. That's an example of construction cost rule of thumb. Things are about 70 percent higher than they were a couple of years ago, so if you're getting lumber package quotes, keep those increases in mind so you don’t get caught short with a quote that's too low or a budget that's too low to complete construction.