When it comes to building a home the major costs include land, materials, cost of capital, legal/permitting/approvals and labor. Labor costs can account for anywhere between 30-60% of the cost to build a home. So as of today where do we stand on these components:

1.  Land: This remains expensive and scarce in central locations, with prices rising in most areas, not falling. Local and Federal governments can help here as they own land that could be viable for homes (although lots of it is remote and not easily connected to infrastructure essentials like water, sewer, power, roads, etc).

2. Materials: Roughly 7.3% of the materials used to build a home in the US are imported. Add tariffs onto that average of around 18% and that could push costs upwards, more so if local suppliers and manufacturers see an opportunity to also raise prices.

3. Cost of Capital: Borrowing costs are elevated right now. If the FED lowers rates this could help. Lower mortgage rates will make buying easier for many, but that is more related to the 10-year Treasury, not construction.

4. Legal/permitting:  The cost of capital compounds the longer it takes to build. The more complex and slow zoning, permitting, approvals and building inspections, etc, the more it costs to build. Many local governments are working to streamline this aspect and reduce/simplify over-complex regulations.

5. Labor: The construction industry suffered the worst loss of skilled labor since the 2008/9 recession. Then Covid exacerbated the problem. Now deportations of undocumented construction laborers (about 30% of construction workers) is making things worse. Reduced labor makes labor costs go up and reduces the ability to build more. Relief for farmers has been discussed, but nothing yet related to construction.

Overall, the costs to build and renovate are prone to increases right now. Buyers take note. Replacement cost should always be considered when evaluating the price of anything. A home for sale now was almost certainly built when costs were lower and while mortgage rates may come down more, chances are that will fuel demand. Combine that with higher building costs and you do the math....