In this bullish real estate market, real estate agents have yet to be faced with buyer backlash from escalating new-home prices. Despite record increases in costs, new-home sales are booming. Why are costs higher, and why don't consumers seem to mind?

Land is more expensive. Many growing communities have caught on to the fact that they can make their new neighbors pay for expansion costs with impact fees. Costs for new roads, sewers, and other services that may be used by the whole community are directly assessed to new homes, causing builders to pass along the fees to the home buyers. Cities have also figured out that by demanding that certain-sized homes be built with complex building restrictions and codes, the lot/home value will be higher, generating more tax revenues for the city. Not to mention keeping out the riff-raff.

Materials are more expensive. Wood, which constitutes one-third of a home's construction costs, has escalated rapidly. According to the National Association of Home Builders (NAHB), a typical 2,000-square-foot home uses nearly 16,000 board feet of lumber and 6,000 square feet of structural panels, such as plywood. At $400 per 1,000 board feet, the lumber package for a 2,000-square-foot-home costs nearly $10,000. Protected forestry and the popularity of certain woods such as Southern pine has lead to a new kind of rustling, in which timber thieves raid privately held forests and sell the timber, driving prices even higher. According to "Random Lengths," an industry report for the lumber industry, prices in the four regions of the United States ranged from flat to double-digit increases last week alone.

But the biggest impact on new home prices in 1998 is labor costs. "The most significant problem faced is labor availability, which you would expect in a tight market," said Kent Colton, executive director of the NAHB, at the International Builders' Show in January. In a poll taken at the show, labor was noted as a significant problem by 67 percent of participants, up from 45 percent last year.

"Less than half the builders said they were having labor problems last year. Now, it's a problem for more than two-thirds," Colton added.

The pool of skilled laborers is decreasing at an alarming rate. As older artisans retire, their offspring are not taking their places. Why? For high school graduates who don't continue with higher education, the lure of a quick tech degree and the promise of employment is irrestible. Many young people don't consider the construction industry to be a true profession, instead viewing it as an unregulated and transient occupation. Through community relations efforts, the NAHB is addressing this issue with an aggressive campaign across the country, which will depict to high school and community college students the pride and sense of accomplishment builders and laborers receive from building something with their own hands.

All of these factors are translating into higher prices. The median sales price of a new home in December 1997 was $142,000; the mean sales price was $177,800. The median price of an existing home (according the National Association of Realtors) for the same period was $125,800, and the mean sales price was $157,300.

But the higher prices haven't slowed sales, according to the U.S. Census Bureau. New homes sold at a rate of 6 percent higher in 1997 than in 1996. New single-family home starts in January jumped 7 percent to 1,196,000 units, up from 1,118,000 in December.

"The single-family housing market is getting a big boost from low mortgage interest rates and a strong economy," Colton said. "The home ownership rate hit a record high of 65.7 percent last year, and we expect it to continue to climb in 1998."

Consumers are jumping on the new-home bandwagon for a number of reasons:

Although building technologies have changed little, builders have changed a lot. Large-volume builders are bringing custom services to entry-level-and-above homes in answer to consumer demand. And they can beat the older home competition by offering extra amentities that are nonexistent in comparably sized older homes. Features such as flexible rooms and electronic/phone wiring for home offices are all part of custom design services that can individualize a home to its new owner's needs.

Older homes often have floorplans that don't fit the lifestyles of today's consumers, and the specter of remodeling costs that couple tear-out costs with new construction often means remodeling will not solve logistical or comfort problems, nor will they necessarily add value to homes at resale time. An example is the current popularity of the open kitchen/family room, where food preparation combines with family interaction -- the perfect solution for busy dual-income owners.

In order to find buildable lots, most builders turn to the suburbs of major cities, where city planners work with them to develop new neighborhoods. New homeowners pay a higher price, but they can retreat to these bedroom communities far from the crime rates, failing schools, and poverty of the inner cities.

All that, and it costs only 12 percent more. No wonder that "new" looks better than "existing" to many buyers.

Published: March 3, 1998

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.