Home Building Costs in Death Spiral

Home building costs are reaching record highs in San Jose, California, and it reflects a larger problem across the United States

A new report from San Jose found builders are facing numerous challenges due to economic pressures, from high interest rates to skyrocketing material and labor costs.

The cost of building one unit of affordable housing in San Jose grew by 24 percent over the past year, surging from $757,900 to $938,700, the city said.

San Jose’s issues are more concentrated due to the scarce land, higher costs of labor and “bureaucratic roadblocks,” Adrian Pedraza, a real estate broker who owns house flipping company The California Homebuyer, said.

“It’s become a huge challenge to build affordable housing there and in similar tech hubs,” Pedraza told Newsweek. “It’s a perfect storm for astronomical pricing.”

Even compared to San Francisco, San Jose’s prices are 26 percent higher per unit, but the problem echoes a trend experienced by home builders nationwide.

Across the country, other cities are experiencing the same thing, but it differs based on local economies.

The worst price hikes have been seen in California and the Southwest due to their unique environmental factors, commercial real estate consultant John Andrews said.

“Insurance for construction is more costly now, especially in states like CA that have experiences a disproportionate number of natural disasters in recent years, especially wildfires,” Andrews told Newsweek.

Murtaza Haider, a real estate expert and professor at Toronto Metropolitan University, said the pandemic specifically brought forth many cost pressures in the construction industry. Disrupted supply chains, labor shortages and inflation all played a role in upping the costs to build a standard housing or commercial development unit.

“The construction costs have escalated faster since the onset of the COVID-19,” Haider told Newsweek.

For 2023, the national average cost to build a house is $329,000, without including the land, according to Forbes, with CBRE’s Construction Cost Index forecasting a 14.1 percent year-over-year increase in construction costs at the end of 2022.

“The construction industry thrives on predictability, but we continue to grapple this year with numerous challenges and volatility, making estimating and managing costs more difficult.” Nicolas McNamara, director of cost consultancy for CBRE, said in last year’s statement.

Lack of Affordable Housing

In San Jose, the lack of affordable housing has been making a significant impact on residents, with 75 percent of the region’s voters saying homelessness is going in the wrong direction, according to The Mercury News.

And, the city is unlikely to get much development, either housing or commercial, due to the high costs associated with building.

“When costs are too high to justify potential returns, projects will be shelved,” Realtor.com chief economist Danielle Hale told Newsweek. “This could lead to a slowdown in residential construction when the long-term trend suggests that the market needs the opposite.”

In Silicon Valley, no market-rate apartment projects got started during the first half of the year, according to CoStar, and interest rates are worsening the situation.

Many developers believe that in order to improve the situation interest rates must go down, but the Federal Reserve has been on a consistent streak of raising rates until inflation gets under control. Currently, inflation stands at around 4 percent, but the Fed is targeting a number closer to 2 percent.

San Jose’s housing problem is more challenging than just getting around high interest rates, too. The California Environmental Quality Act has prevented a lot of developments from getting underway due to requirements for a thorough environmental review.

In 2021, 45 percent of San Jose’s residents were considered lower income and eligible for tax credit housing, according to The San Jose Spotlight. However, only a quarter of the city’s housing is rent-restricted apartments.

Pursuing dense housing instead of single-family homes might help, but policy changes are necessary in order to improve the situation, Pedraza said.

“Tweaking regulations that commonly delay projects would go a long way,” he said.