Across America, housing costs have skyrocketed. A natural explanation is rising construction costs. After all, building costs on average account for an estimated 60-70 percent of the full cost of bringing a new house to market in a land-unconstrained area. In their paper, however, Brian Potter and Chad Syverson dig into 75 years of data to show that building costs have never had all that much explanatory power over US housing prices, and even the imperfect correlations of the past have weakened further in recent decades.
Perhaps the clearest conclusion of this analysis is that building costs have never had all that much explanatory power over US housing prices, but even the imperfect correlations of the past have weakened further in recent decades along multiple dimensions.
By going back three-fourths of a century, this research highlights a pattern that threads itself through the results in multiple ways; namely, that to the extent construction costs explain house price patterns, they are explaining less than they used to.
Produced by Abby Hiller, Senior Manager of Research Translation and Impact, with Eric Hernandez, Senior Officer of Digital Media and Data Visualization
