Why Do Some Areas Vary So Much in Cost?
The housing prices, construction costs, and mortgage rates vary significantly across the country. Generally, the costs are higher in coastal cities and remote locations like Honolulu and lowest in the South.
Suppose you compare the costs of a median-priced dwelling in Hawaii vs. South Dakota, you'll find some serious discrepancies. So, what causes these disparities, and why do some areas vary so much in cost? Well, many variables influence the varying construction costs between areas, with the cost of labor being the major determiner. While costs of materials also affect the cost of construction, unlike labor costs, they usually vary little geographically.
Let's find out how construction costs vary between locations and the factors that contribute to these differences.
How Construction Costs Vary Significantly Between Cities
Construction costs can vary substantially from city to city, according to Rider Levett Bucknall's "North America Quarterly Building Cost Report: Fourth Quarter 2019."
According to the report, San Francisco had the biggest percentage change (7.79%), followed by New York and Washington. Only New York and Boston had a change of greater than 4%. Portland, Seattle, Honolulu, Washington, D.C., and Chicago witnessed 5-7% hikes.
The cost of construction in the United States went up by 5.2 percent between October 2018 and October 2019. However, the pace of rising differed greatly across the twelve cities surveyed in the report.
The six markets that outperformed the yearly average of 5.2 percent were:
San Francisco, Calif. (7.8 percent)
Chicago (6.3 percent )
Honolulu (Hawaii) (6.2 percent)
Seattle (6.2 percent)
Washington, D.C. (6.2 percent)
Portland, Oregon (5.8 percent)
The following six markets came below the annual average growth rate of 5.2 percent:
Los Angeles, California (1.1 percent)
Boston, Massachusetts (4.2 percent)
New York City (4.3 percent)
Denver (4.3%)
Las Vegas (4.8%)
Phoenix, Arizona (5.0 percent)
Projects included in the study included retail establishments, hotels, as well as hospitals and industrial facilities.
Factors That Contribute to the Vast Variety of Construction Pricing
The discrepancies in construction costs in the U.S. results from several factors. Below are the main reasons why some areas vary so much in cost.
1. Location
There are several elements to consider when deciding how much you'll pay to build your home. One key aspect is location, which will determine whether you'll pay more or less than another individual.
For example, when you build a home in Hawaii, Honolulu, your costs will likely be higher than in Oklahoma or Tennessee due to the high labor costs resulting from the comparatively high cost of living.
According to research, Honolulu even overtook New York City to become the most expensive city in the United States to construct in at the beginning of 2015. Almost everything in Honolulu is expensive, from groceries to utilities.
Rider Levett Bucknall, a world-renowned builder, estimates the following price per square foot for a house in Honolulu, Hawaii: The cheapest you can get is $290 per square foot, while $780 a square foot is the most expensive.
On the other hand, building a home in the southern United States costs on average $110.19 per square foot and ranges from $60 per square foot, which is the cheapest you can get, to over $150 per square foot for high-end prices, according to the 2019 U.S. Census Bureau report.
2. Land costs
A major factor of the cost of construction is land value and legal development restrictions. This can lead to high land prices and lower overall costs or low land prices and higher overall costs.
There are also various zoning regulations, such as height restrictions on buildings, which vary by town. These factors have a substantial impact on the eventual cost of new developments in the United States.
For example, a high-rise building in Honolulu, Hawaii, will likely cost more than a high-rise building in Las Vegas, Nevada.
Why is this?
It's mostly because land value and legal development restrictions play an important role in construction price. In Honolulu, a major factor that affects construction costs is density. This includes how much open space there is and how much of the area can be developed.
Since Honolulu has a high density, constructing larger buildings is more expensive because there is less land space than in other cities. In the case of Las Vegas, since there are no height restrictions, you're able to pack as many floors into one building without worrying about the land space.
That is why constructing a building in Las Vegas of the same size as one in Honolulu will likely be significantly less expensive because there's more land, despite being just five stories tall.
3. Population density
Population density is the most significant factor in determining construction costs because it determines how much infrastructure is required.
Also, higher population density means more congestion on roads and residential areas, creating traffic problems that further increase construction costs. Cities with the lowest population densities, like Virginia Beach, have the lowest construction costs compared to Honolulu, Hawaii, and New York City. Why is this? Because the high population density increases infrastructure costs like roads and sewage systems.
An example is Honolulu, Hawaii's largest city and Oahu's largest county, with an estimated population of 350,399. More than 30% of Hawaii's total population lives within Honolulu city limits. This has led to increased costs for road construction, sewage systems, and utilities like electricity because more people are using them at once.
However, if you live in Sioux Falls on the eastern edge of South Dakota, your population density is less than half that of Hawaii's, with only about 2,264.1 people per square mile. This means that fewer people are using these resources, which leads to lower construction costs.
4. Cost of building materials
Construction material cost consists of material cost, shipping charges, and tax. All three of these account for the variation in prices between cities. Here's a breakdown:
Material Cost
Material cost is the price specific to a single product. In this case, that would be the brick, glass, steel, or plywood which goes into an individual building. Building materials also vary significantly in price depending on whether they are made in the U.S. or not.
The cost of building materials in Hawaii is higher than in many other places. That's because much of the material used to build a house here is imported from other countries. Building a house in Hawaii requires a lot of transportation to bring the materials here, which drives up cost.
Shipping costs
Shipping charges are based on where you're located and how far away your source is. They also vary depending on whether it's an international shipment and the size of the container the product is shipped in.
Taxes
Taxes, like shipping charges, mostly depend on where your source and location are and the tax rate of that state or province.
It's important to note that taxes can also vary depending on whether there's a special tax for building materials used for construction purposes. Some states have these kinds of taxes, while others do not.
5. Labor rates in the area
Labor rates make up the most expensive and important factors of a construction project alongside materials and equipment. As such, they play a significant role in varying the construction costs across different cities.
Labor rates vary steeply around the country due to several factors, including where wages are highest, how much work is available for employees, and what wage scales employees are used to working with on previously built projects.
Also, some areas have higher labor rates than others because of, among other factors, not having enough qualified personnel and a stretched thin labor pool that is not productive, making the project take longer. In Honolulu, Hawaii, there is a lot of construction going on, and the population density is high. Labor rates are also high because demand has increased along with supply.
6. The costliness of utilities like electricity and gas
One of the main reasons construction costs vary significantly from city to city is that utilities like electricity and gas prices differ.
Utilities like electricity are expensive but necessary for completing any job. In some cities, renovating an older building can easily quadruple your electrical costs compared to a newer building that already has all the wiring in place. These high utility rates often push landlords out of their rent-controlled properties and make it difficult for developers to recoup their investment.
Places that use a lot of natural gas as a source of fuel tend to have higher costs. This is because they have to pay more money for it since it is expensive. Price levels are only one factor that determines how much people pay for these services, though. Availability often plays a huge role since some utilities will charge more if you use them at non-peak times or want to increase your usage during these periods. This makes it difficult for people to reduce their utility usage and thus drives up costs even more.
Bottom Line
Home prices are on the rise, and it's not just because of supply-and-demand trends. Construction costs have also risen sharply in recent years due to increased demand for new homes across the United States. This post provides you with all the information about construction cost drivers and how they impact the cost of building homes.
