The Role of Construction-Cost Inflation in the Housing Crisis_#26.27
July 6, 2026
Estimates of the “housing shortage” range from 3½ to 5½ million units (Estimates of a “Housing Shortage”).
Supply-side contributors commonly cited include regulatory costs (including zoning restrictions), financing costs and construction input costs (Housing Supply: Current Trends and Policy Considerations).
The first two factors receive a lot of attention, but relentlessly increasing building costs probably should be at the top of the list.
Since the bottom of the last housing cycle (2012), construction costs have risen about 5% annually, more than twice as fast as consumer price inflation and notably more than per capita disposable personal income (20% faster) and personal consumption expenditures (14% faster).
Said differently, housing remains in high demand but productivity growth in housing construction is low. In part, this is due to a preference for labor-intensive site-built single-family housing.
What’s the evidence for a housing supply crisis? Americans are not holding back on homebuilding; in fact, residential-construction outlays have almost tripled since 2012, growing much faster than overall GDP. (See Fig. 1) Measured by dollars spent, residential investment also has grown much faster than nonresidential fixed investment (structures, equipment and intellectual property products). Rather, the strongest argument that there is a housing crisis is declining affordability. At the aggregate level, house prices have far outstripped incomes with most of the gap opening in the last five years. (See Fig. 2)
The housing-supply crisis is due to poor “bang for the buck.” Residential construction suffers from very low productivity growth. Fig. 3 shows that dollars spent on homebuilding per capita rose by 159% between Q1.2012 and Q1.2026 (quarterly annualized rates) but the amount of housing produced (real investment) increased only by 32%. Residential construction produces a very poor “bang for the buck.”
Are regulatory and financing costs over-emphasized? Regulatory costs are a significant factor in some locations, but there is little reason to believe they are getting much worse every year, not least given the widespread attention they are receiving. In other words, their contribution to the housing shortage isn’t necessarily getting worse. Likewise, 30-year mortgage rates are high now compared to the decade after the Global Financial Crisis, but they’ve been in the 5½ to 7½% range for four years. Hence, financing costs also are not making the housing crisis increasingly worse year after year.
The inflation of homebuilding costs is relentless. The cost of residential construction has doubled since 2012 (up 96%; see Fig. 4).[1] Meanwhile, the cost of nonresidential construction increased by 56%. The gap between residential and nonresidential cost inflation likely is due to factors such as industry structure and the technology employed. Building single-family homes on location with a large number of skilled and general-purpose workers is relatively “old-fashioned” and “low-tech,” racking up high costs.
Is the housing crisis just a construction-cost inflation problem? Since 2012, the cost of residential construction has increased at a 5% annual rate, more than twice as fast as consumer prices and notably faster than per-capita disposable income.
House prices rise rapidly when strong demand for housing pushes against a very low-productivity supply response.
There is little prospect of a solution soon.
Figure 1
Figure 2
Figure 3
Figure 4
Sources: Bureau of Economic Analysis: Federal Housing Finance Agency; author calculations.
[1] The cost index for residential construction includes the cost of the physical structure, site preparation, and improvements to the land, as well as brokers’ commissions and closing costs associated with the sale and transfer of residential properties. The underlying value of the unimproved land is excluded. See Bureau of Economic Analysis, Private Fixed Investment.
Baumol effect?