Labor and Subcontractor Costs Outpacing Inflation, Raising Home Prices

Last Thursday’s post reported on the record share of single-family builders reporting shortages of labor and subcontractors.in the July survey for the NAHB/Well Fargo Housing Market Index. The same survey asked builders about the effects the shortages were having on their businesses.  The most widespread effects were causing builders to pay higher wages/subcontractor bids (reported by 84 percent of builders), forcing them to raise home prices (83 percent) and making it difficult to complete projects on time (73 percent).

These have consistently ranked as the most commonly reported effects of the labor and subcontractor shortages since NAHB began asking builders about them in 2015. However, all three have become even more common recently.  The steepest upward trend has been in the share of builders saying the labor/sub shortages are causing higher home prices, which increased by 22 percentage points between 2015 and 2018, to the point where it is now nearly tied with higher wages/sub bids as the most widespread effect of the shortages.Also included in the surveys are questions about how much labor and subcontractor costs for building the same house have increased over the previous 12 months.  The chart below shows the average responses and compares them to overall inflation (measured by the change in the Consumer Price Index over the same 12-month period).

Three tendencies are clearly evident in the chart.  Inflation overall has been on the rise since 2015, the cost of labor has consistently outpaced overall inflation, and the cost of subcontractors has risen even faster than the cost of labor directly employed by builders. In 2018, for example, overall inflation was 2.9 percent, but labor costs increased by 5.2 percent—and subcontractor costs by 7.2 percent—over the same period. This is particularly significant, given that three-fourths of construction cost typically represents work performed by subcontractors. It is also consistent with the survey results reported last Thursday, showing that the incidence of shortages was higher for subcontractors than for labor directly employed by builders in 14 of 15 occupations.  The previous post also discussed reasons for this.

Other effects of labor and subcontractor shortages are less common, but nevertheless on the rise. For example, the share of builders indicating that the shortages have slowed the rate they accept incoming orders doubled between 2015 and 2018 (from 16 to 32 percent). Even the least common of the effects—lost or cancelled sales—was up to 26 percent in the latest survey, suggesting that the shortages are having a significant impact on production levels.

Readers interested in more details, including a complete history of responses to every question in the labor availability surveys, can consult the full report.



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