The Challenges of Building in Today’s Economy

Rising housing costs and rent aren’t going away anytime soon, and the one thing that could assist — new construction — will continue facing challenges this year. Every year, the Associated General Contractors of America (AGC) creates an outlook on the year ahead, and in 2023, they are bracing for more trouble. 
In addition to difficulty hiring workers and maintaining project deadlines, they anticipate supply issues, which have already caused inflation in the cost of construction materials and project deliveries.

In the past few years alone, the increase in commercial construction costs has been nearly 14% year-over-year, which is substantial. Rising labor and material costs have affected many of Austin’s affordable housing projects, like multifamily residential projects, high-rises, condominiums, and apartment complexes.

To complicate matters even further, supply chain issues are ever-changing and often complex. This makes it exceptionally challenging for contractors to meet deadlines and stick to budgets during a project. Many projects from previous years had to be postponed due to rising costs of insurance, financing, and interest rates.

A spokesperson from the AGC believes that construction costs will likely level out this year, and while activity could remain slow, that’s a positive thing for many companies. Construction activity slows when projects are delayed or put on hold, which could decrease costs.

While positivity may be on the horizon, and prices are slowly decreasing, builders still face several challenges today. Here are a few of the most common issues builders faced in 2022 and will continue to face in 2023.

 

Financing Concerns

Potential homebuyers want to see new construction, but securing financing for their projects is becoming a struggle. There are two significant factors involved: increased debt-to-income ratios and rising interest rates.

Reputable builders don’t want to commit to building a home that may not sell. Mortgage rates are still relatively low compared to previous years, but they have nearly tripled since COVID-19 and generally follow inflation and the U.S. 10-year Treasury Bond’s yield. In light of higher interest rates, many buyers have been waiting on the sidelines.

 

Attracting Potential Buyers

There are several obstacles that builders need to overcome when finding interested and qualified buyers. The high-interest rates are the most significant part of this, as potential buyers are opting to wait until rates improve in their favor. In addition, due to increased mortgage rates, many buyers want to purchase new construction but cannot find a buyer for their existing property. Those who bought homes during the pandemic secured record-low rates and don’t want to trade for higher rates, so they are awaiting improved market conditions.

 

Higher Building Costs

Material costs remain a substantial concern for builders as well. Although supply shortages aren’t as tight as we saw during the pandemic, inflation has caused an increase in wholesale prices. Builders are also troubled by residential building codes and energy efficiency requirements. As these codes take effect, the industry becomes more rigid. This, in turn, leads to rising expenses for both materials and labor. In addition, labor shortages are still having an impact.

 

Land Use Complications

Land use regulations also significantly affect development prospects and only worsen housing shortages. Local governments need to balance the need for affordable housing with zoning laws, while builders deal with inadequate infrastructure and increasing environmental regulations. Nearly every major American city is experiencing a housing shortage, and Austin is no exception.

If you’re hoping to begin your home search, talk to the experts at HomeBase today to learn more or get started on your real estate journey.