What Will Make Building Costs Go Down?

The cost of constructing new buildings is a significant concern. This analysis explores the current landscape of building costs, delves into their specific components, and examines the broader economic forces at play.

Current State of Building Costs

Building costs have substantially increased in recent years, impacting residential and commercial projects. Construction input costs, including materials and labor, have risen 38.7% since February 2020. This surge led to the average construction cost of a new home reaching a record high of $428,215 in 2024, the highest level since tracking began in 1998. Overall construction costs accounted for 64.4% of the average price of a new home in 2024, an increase from 60.8% in 2022.

Widespread supply chain disruptions have been a primary driver of these elevated costs. These disruptions increased prices for essential construction materials due to heightened demand, shortages, and rising transportation expenses. The pandemic intensified these challenges, exposing global supply chain vulnerabilities and causing significant material price volatility.

Labor shortages further exacerbate the situation, contributing to project delays and higher overall costs. The construction industry faces a persistent shortage of skilled workers, including carpenters, electricians, plumbers, and masons, which worsened since 2020. This scarcity forces contractors to offer higher wages to attract and retain talent, driving up labor expenses. Hourly retail labor costs in construction rose by 6.2% from January 2023 to January 2024. Longer construction times from labor shortages cost over $10 billion annually.

Core Cost Components and Their Drivers

Building costs are composed of several elements, each influenced by market dynamics. Material costs represent a substantial portion, with key commodity prices showing significant volatility. Lumber prices have moderated from peaks but remain 20-30% higher than historical averages as of 2025. Steel prices have moderately increased, rising from approximately $800 per ton in 2019 to between $1,000 and $1,200 per ton in 2025. Concrete costs typically range from $125 to $150 per cubic yard, though prices vary based on additives and mix types. Other materials like drywall, insulation, roofing, and flooring have seen 5-10% price increases recently due to ongoing supply chain issues and inflationary pressures.

Labor costs are another significant component, directly impacted by the availability of skilled workers and prevailing wage rates. The construction industry continues to grapple with a shortage of skilled tradespeople, which puts upward pressure on wages as companies compete for a limited pool of qualified individuals. This shortage is partly due to an aging workforce and a decrease in younger individuals entering the trades. Contractors often need to offer higher pay, improved benefits, and signing bonuses to attract and retain employees, directly inflating project costs.

Energy costs influence building expenses both directly and indirectly. Fuel prices directly affect the cost of transporting materials and equipment to construction sites. Energy is a significant input in manufacturing many building materials, like cement and asphalt. Fluctuations in energy prices can lead to corresponding changes in material costs.

Financing costs play a role, particularly for projects relying on borrowed capital. High interest rates significantly increase the cost of obtaining construction loans, making projects more expensive to undertake. In 2023, 90% of builders identified high interest rates as a substantial challenge. These increased borrowing costs can translate into higher prices for the final built product.

Regulatory and permitting costs represent a smaller but consistent portion of overall building expenses. These include fees for building permits, impact fees, water and sewer connections, and various inspections. Site work, which encompasses permitting and fee-related expenses, along with architectural and engineering services, typically accounts for around 7.6% of total construction costs. The complexity and duration of the permitting process can also indirectly add to project costs through delays.

Broader Economic Influences

Beyond the direct cost components, broader economic forces exert considerable influence on building expenses. Inflation, a general increase in prices, directly impacts the cost of goods and services across the economy, including construction materials and labor. Persistent inflationary pressures have been a primary contributor to rising construction costs.

Monetary policy, particularly interest rate decisions made by central banks, significantly affects borrowing costs for construction projects. When interest rates are high, the cost of financing new construction increases, which can slow down new projects and influence overall demand. Conversely, lower interest rates can stimulate demand for construction by making financing more accessible and affordable.

The stability of supply chains is an important factor for managing material availability and pricing. Global events, geopolitical tensions, and trade disputes can disrupt these supply chains, leading to manufacturing slowdowns, transportation delays, and reduced exports of raw materials. A resilient and efficient supply chain helps ensure consistent material flow and predictable pricing, mitigating sudden cost spikes.

Overall economic demand directly influences the volume of construction activity and, consequently, pricing. A strong economy characterized by consumer confidence, robust housing market activity, and increased investment typically drives higher demand for new construction. This increased demand, if not met by sufficient supply capacity, can lead to upward pressure on building costs.

Government fiscal policies can also shape the construction landscape. Public spending on infrastructure projects, for example, can create significant demand for materials and labor, potentially influencing market prices. Government initiatives aimed at stimulating housing construction or promoting specific building types can impact resource allocation and overall industry costs.

Conditions for Future Cost Changes

A moderation in building costs hinges on a combination of factors that address both supply-side constraints and demand-side pressures. Stabilization of supply chains is a prerequisite for more predictable material pricing. This involves reducing transportation bottlenecks, increasing manufacturing capacity, and diversifying sourcing to minimize reliance on single points of failure. When materials can flow more freely and reliably, the premiums associated with scarcity and logistical uncertainties tend to decrease.

A rebalancing of demand and supply within the construction sector is also necessary. If the pace of new construction demand moderates while the industry’s capacity to produce materials and provide labor increases, competitive pressures could lead to price reductions. This involves addressing the backlog of projects and ensuring that material production can consistently meet or exceed market needs.

Adjustments in monetary policy, specifically changes in interest rates, can significantly influence construction costs. A reduction in interest rates by central banks would lower borrowing costs for developers and homebuyers, potentially stimulating demand but also making projects more financially feasible. Conversely, sustained higher rates could dampen demand, potentially leading to more competitive pricing from builders.

Shifts in labor market dynamics are important for controlling labor expenses. An increase in the availability of skilled labor, perhaps through expanded training programs or increased workforce participation, would alleviate wage pressures. As the pool of qualified workers grows, the intense competition for talent that drives up hourly rates could subside, contributing to more stable labor costs.

Energy price stability is another influencing factor. Consistent or decreasing fuel prices would reduce transportation costs for materials and lower the energy-intensive production costs of certain building components. This would translate into lower overall material expenses, which are then passed down through the supply chain to the final construction project.

Ultimately, a return to more balanced and predictable economic conditions across these various sectors would generally contribute to a more stable and potentially lower cost environment for building.