Terner Center
By Muhammad Alameldin, David Garcia
The constraints on housing supply are a significant contributor to the current housing crisis. The median price for a home in California sits at $800,000, the highest in the country, and in the last decade, the state has failed to produce enough homes to keep up with job and population growth. Now coupled with rapidly rising interest rates, California’s homebuyers have lost significant purchasing power. For example, a family that could afford a home for $900,000 before recent interest rate increases can now only afford a home price of $650,000—resulting in over 25 percent less purchasing power as of May 2022 and this trend will likely continue to worsen. Instability in the buyers’ market directly impacts the building industry, with fewer homes being built since developers do not want to risk not selling newly constructed properties. At the same time, the cost of building materials continues to rise, leaving less financial capital to build new homes.
The largest driver of costs continues to be materials and labor. A recent investigation by the Los Angeles Times found that the cost of building several new affordable housing developments has ballooned to nearly a million dollars per unit. The projects included in the article are located in the Bay Area, which may now possibly be producing the most expensive affordable housing in the country. To be clear, the projects examined by the LA Times are outliers, and the per-unit costs of most affordable housing built in California does not cost nearly as much as those projects profiled. However, these projects are indicative of larger trends of the increased costs of building housing overall. Our research has illustrated that multiple factors contribute to the high cost of building in California. And these issues are not just limited to affordable housing: we have also shown that costs for market-rate projects have increased significantly over time. In our 2020 report, the per square foot hard cost to construct multifamily homes climbed 25 percent over the last decade after adjusting for inflation. The cost of wood, plastics, and composites rose by 110 percent after inflation, with finishes rising over 65 percent. The hard costs of a newly constructed home in California keep rising, with hard costs of building housing increasing by $68 per square foot compared to a decade ago. Since the report’s publication in 2020, these costs have only increased.
And while California generally leads the way in the development costs, prices are skyrocketing across the country, with residential construction costs rising by nearly 19 percent over the same period last year. These increases are driven by huge price increases for materials such as insulation, exterior finishes, and electrical components, which have all risen nationwide by about 10 percent in price in the last quarter alone. High interest rates are cyclical and determined by the Federal Reserve in response to the state of the overall economy. Rising construction costs are an annual trend, meaning fewer homes are going to be economically feasible to build, likely compounding housing affordability and supply for the long term.
So, what is California doing to address development and construction costs?