Construction, land top costs of housing

Although home prices have decreased in some areas, the cost of a new home can still give buyers sticker shock. Have you ever wondered what it actually costs to construct a home and how much builders profit from each sale?

Every few years, the National Association of Home Builders (NAHB) conducts a survey of its members to learn what it costs to build a common single-family detached home.

The survey is based on 50 single-family detached homes constructed in 35 metropolitan markets, with an average of 3,340 square feet and a sales price of just under $455,000. Because the surveyed homes are in metropolitan areas, they are a larger and more upscale than the average American home, which is typically about 2,500 square feet.

Although the NAHB survey is not comprehensive, the statistical percentages reveal what builders spend to build most American homes.

The survey found that the largest component of the overall price in a home is the construction costs, which is about 48 percent or $219,000 of the total $455,000 sales price.

Construction costs include everything from framing the home — the largest cost in this category — to excavating the lot and laying the foundation. Construction costs also include cabinetry, windows, fixtures and all the other finishing touches inside a home. These items are typically purchased by the builder from a manufacturer.

“A lot of the construction now — compared to 30 to 50 years ago — is not done on site,” says Gopal Ahluwalia, NAHB’s vice president of research. “For instance, nobody is building windows and doors and things like that on-site. Now they all come from factories.”

Today, builders are offering buyers more in a new home compared to homes sold 30 years ago. For example, fireplaces are a fairly standard feature in today’s average home, but buyers used to have to pay extra for it. The same is true for a two-car garage.

“Ceiling heights are also going up,” Mr. Ahluwalia says. “It used to be the standard ceiling height was eight feet in an average home. Now it’s nine or nine and a half feet. If you move from eight to nine feet, you are adding to the costs for the builder.”

The changes to the American home have caused manufacturers to make adjustments. For example, gypsum wall board used to come in 4-by-8-foot sheets. But because standard ceiling heights have changed, now they come in 9- or 10-foot sheets.

The second highest cost in a home’s price tag is the land cost, which is about 25 percent or just under $111,500 of the total $455,000 sales price in the NAHB survey.

The raw land purchase is about 40 percent of the $111,500, while the costs associated with developing the raw land adds up to another 60 percent. These costs include such items as landscaping and sewage systems.

“The land cost share varies widely by location and by the price of the home,” Mr. Ahluwalia says. “Within a metropolitan area, there can be very wide variations because of where you have a piece of land. It can range from 15 to 40 percent of the price of the home.”

Mr. Ahluwalia says that in Fairfax County, for example, land development costs can be higher because of taxes and that the development time can be longer. In addition, there are a number of environmental requirements.

In contrast, development costs in rural areas of the Midwest are lower because many jurisdictions there require less from home builders, Mr. Ahluwalia says.

Builder profit comprises another 8 to 11 percent of the sales price of a home, or about $36,000 to $50,000 of the total $455,000 listing of a single-family detached home cited in the survey.

In today’s slower housing market, however, Mr. Ahluwalia believes that builders are getting closer to 5 to 7 percent profit.

“Today, builders are giving away so much to lure buyers. When you give away free items, you eat into your profit,” Mr. Ahluwalia says. “Big builders are eating more into their profit because if you are selling a large inventory, then carrying those houses has costs attached with it. They want to unload them as fast as possible.”

Mr. Ahluwalia says builders are not only offering free amenities and upgrades, but he suggests that current market trends have caused about 60 percent of builders to reduce their sales prices. In order to increase sales, some builders are offering to pay mortgage points or help buyers sell their existing home.

To stay competitive in today’s slow housing market, other builders have decided not to reduce the sales price of their homes, opting to build more quality into their homes to lure buyers to a higher-end product.

Some builders are taking a look internally at the way they are organized to create better efficiency and an improved business plan to compete and stay profitable in this market.

Tony Callahan, senior vice president for national purchasing, planning and design for Beazer Homes Corp., says the company has been implementing a number of changes in the businesses and products it utilizes and homes it builds.

Mr. Callahan says Beazer took an inventory of the number of houses it was building to determine what was selling and what was not.

“At the house-plan level, we’re cutting our house plan base by more than a half, so that what we have, then, is fewer plans that our supply chain is able to build and in greater repetition so that they get better at it,” Mr. Callahan says.

At another level, Beazer has reviewed all of its stock-keeping units (SKUs) to implement a material SKU rationalization.

“We are now driving more velocity through fewer SKUs. From a supply chain standpoint, what that’s allowing that supply chain to do is to improve the inventory turnover of those SKUs,” Mr. Callahan says. “So we’re trying to focus more on the customer and give them what they want and narrow that down to a point to where it can be done efficiently and cost effectively.”

Lastly, Beazer is evaluating its suppliers.

“If you are in a market and you have six different contractors supplying your dry wall, well, that doesn’t make sense,” Mr. Callahan says. “So what we want to do is determine who is the best supplier for us. And then let’s drive more volume through them and let’s work more closely with them. It is really a focus to simplify and standardize.”

Mr. Ahluwalia says some home builders are trying to save money in the current market by cutting the amount of time that it takes to build a home, or “cycle time.” U.S. Census data shows that it usually takes about 180 days to build a house, but many builders are trying to cut that to 90 or 100 days to reduce costs.

The sales price in an average single-family detached home also includes builder overhead and general expenses, which include running an office and vehicle costs. This category makes up about 7 percent of the typical sales price, or about $32,000 of the survey’s total $455,000 sales price.

Sales commission can also be a component of the sales price, as many national home builders use their own sales forces to sell homes. Mr. Ahluwalia says that in a slow market, sales commissions actually go up, giving their sales force incentive to sell more homes. The 2007 survey found this category accounted for over 4 percent of the cost of a home.

Naturally, builders also use marketing techniques to sell homes, such as placing ads in newspapers or on the radio, and providing promotional material for interested home buyers. Marketing costs account for over 2 percent of the sales price.

According to the national survey, the last major component of a new home’s sales price is bank financing costs incurred by the builder for the purchase of land and materials used to build. This total is also more than 2 percent of the sales price.

“From the day the builder puts the shovel in the ground, he starts getting that money in installments as the house starts to rise from the ground up,” Mr. Ahluwalia says.

For a detailed breakdown of the 2007 National Association of Home Builders survey of construction costs for a single-family detached home, visit the Web site at www.nahb.org/fileUpload_details.aspx?contentID=85008.