By Ty Warr
In January 2012, the average home value in Utah was $199,000. In September 2021, it was reported to be $498,273. In about 10 years, home prices have increased by almost $300,000.2 Why have home prices in both Utah and throughout the country increased so dramatically?
Home prices in Utah have steadily increased over the past 10 years. Within the past year, the most significant price increase has been seen in the volatile housing market. Figure 1 shows the housing prices by year from 2012 to September 2021.
Data Source: Zillow – Utah Home Values
There are numerous factors that contribute to this dramatic increase in the housing market, but I will highlight four main reasons: growing demand, limited supply, increased material cost, and labor shortages. Each factor has greatly contributed to increased housing costs in Utah and throughout the United States.
Growing Demand
The demand for houses has steadily increased over the years. People are beginning to make more money. The median income in the US in 2012 was $54,569, and in 2020, the median income jumped to $67,521.3 As people begin to make more money, they look to move out of their apartments and they invest in houses. As income has steadily increased since 2012, so have the home values in past years. It is a simple idea that as people make more money, they spend (or invest) more money. Many people have looked to invest that money in a home.
Limited Supply
There is a simple concept in economics that is learned early on: the idea of supply and demand. If the supply is greater than the demand, prices will decrease. If the demand is greater than the supply, prices will increase.
The number of houses on the market and under construction has decreased dramatically in recent years. Houses were being built at an all-time high in the United States in the early 2000’s. In 2005, the number of new houses built reached over 2 million for the year. However, there was a sharp decline in new construction during the 2008 recession in the United States. The number of new houses starting construction dipped to less than 500,000. Since then, there has been a steady increase in the number of houses being built, but these numbers have not reached the pre-recession numbers.4 The demand is growing at a faster rate than the supply.
The dramatic drop in the number of houses being built for many years significantly decreased the supply of houses on the market. As stated earlier, more people are looking to leave their apartments and move into a home, meaning the demand has increased as well. The disparity between the supply of houses and the number of people wanting to buy a house is a major reason for the increase of housing prices. Theoretically, prices will continue to increase until the supply has reached the demand.
Increase of Material Costs
Even people not involved in construction have heard about the soaring price of lumber. Lumber is an important commodity in residential construction. Most new houses built in the United States are framed out of wood. In the past, it has been a cheap, easy, and efficient way to build a home. Lumber is also a renewable resource. More trees can be planted and milled into lumber, essentially making it an unlimited source to use as a building material. There are several factors that have caused the price increase, but those details are better suited for another article. The fact of the matter is that lumber has increased in price by over 400% from 2020 to 2021.5
To put the increase of lumber into perspective, let’s compare it to the price of gas. If gas prices had followed the same increase as lumber from 2020 to 2021, gas would cost over $12 a gallon.
While other building materials have increased over the past years, they have not increased as dramatically as lumber. Concrete prices have increased significantly over the past 10 years.6 Concrete is a major building material in residential construction. The footings and foundation of a house are normally constructed with concrete, as well as subfloors in either the basement or on the first floor. With concrete being used for many different parts of the home, the increase of price for the builder will increase the final price for the homeowner.
Across the board, the price of building materials has increased. General contractors must pay more to purchase these materials, which intuitively increases the price at which the general contractor sells the home.
Labor Shortage
As general contractors struggle to find affordable building materials, an even bigger obstacle has emerged: the number of people in skilled trades has greatly decreased over the years. Eighty percent of general contractors say that it is difficult for them to find skilled tradesman.7
A big part of building a home is building the wooden skeleton of the house, known as framing.
Source: Wikipedia8
I personally work as a framer during the summer as well as part-time during the semester. I have seen firsthand that there are not many people that want to get into the trade. My boss has struggled to expand his business and find more people that want to work. I have also heard from the general contractors who hire the crew that it is a challenge to find reliable subcontractors.
This labor shortage may seem insignificant to some, but it should be a big concern for all. Not being able to find people to perform the work creates two problems for the general contractor. First, the limited number of tradesmen increases the time it takes for a general contractor to build houses. As in many industries, in construction, time is money. The longer it takes for them to build the house, the greater the cost for them, which they then pass on to the homeowner.
The labor shortage also gives more power to the subcontractors. For example, a framer can ask for more money to frame a house, as he knows that there is less competition. With few other options to choose from, a general contractor is usually forced to concede to pay more money to the framer. This cycle repeats itself in many other trades as well, as the subcontractors know that there are not many other alternatives for the general contractor. Such monopolies result in the general contractor raising the final price of the house to cover his increased labor costs.
Why Is Understanding the Housing Market Important for You to Know?
As current and future home buyers, it is worthwhile to know the ins and outs of the housing market. Having more knowledge about a certain topic is an advantage. Becoming more educated on the trends of the housing market will better equip us to make smarter purchasing decisions. If we know that the values of homes are increasing in a certain area, then we will be more confident that we can get a return on our investment. We should stay away from purchasing in an area where home values are decreasing. If we know some of the reasons as to why they’re decreasing, such as the supply of houses versus the demand, the material costs, and the labor outlook, then we can better predict the prices of new homes in the future and make more informed buying decisions.
Notes
- “How to Turn Your Tract House into a Charming Home.” Green Residential, January 15, 2020. https://www.greenresidential.com/6-ways-add-charm-character-tract-hous/.
- “Utah Home Values.” Zillow.com, 2021. https://www.zillow.com/ut/home-values/.
- Research Department, Statista, and Sep 21. “Average (Median) Household Income 1990-” Statista. Statista, September 21, 2021. https://www.statista.com/statistics/200838/medianhousehold-income-in-the-united-states/.
- “U.S. Housing Starts Data [2021]: Historical Charts & Statistics.” iPropertyManagement.com, November 17, 2021. https://ipropertymanagement.com/research/housing–starts.
- Zhang, Xufang, and Aaron Stottlemyer. “Lumber and Timber Price Trends Analysis During the COVID-19 Pandemic.” Texas A&M Forest Service, June 2021, 1–
- Best, Raynor de. “PPI of Concrete Products in U.S. 1990-” Statista, September 16, 2021. https://www.statista.com/statistics/195544/us-producer-price-index-of-concrete-products-since1990/.
- Associated General Contractors. “Eighty Percent of Contractors Report Difficulty Finding Qualified Craft Workers to Hire as Association Calls for Measures to Rebuild Workforce.” Eighty Percent of Contractors Report Difficulty Finding Qualified Craft Workers to Hire as Association Calls for Measures to Rebuild Workforce | Associated General Contractors of America, 2021. https://www.agc.org/news/2018/08/29/eighty-percent-contractors-report-difficulty-findingqualified-craft-workers-hire.
- “Framer.” Wikipedia. Wikimedia Foundation, March 28, 2021. https://en.wikipedia.org/wiki/Framer.