Building Costs Aren’t to Blame for High Home Prices
The link between construction costs and real estate prices has weakened in recent decades.
- By
- September 30, 2025
- CBR - Economics
Buying a house used to be a rite of passage for middle-class Americans, but in recent decades, would-be homeowners have found themselves priced out of the market. The affordability crisis has become such a hot topic that in July the Senate Banking Committee approved a bill aimed at encouraging new home construction with rare unanimous bipartisan support.
For policymakers set on making homeownership more affordable, bringing down building costs might seem like an obvious place to start: In areas where land for new construction is readily available, construction expenses account for 60–70 percent of the cost of bringing homes to market. (Land prices, as well as legal, engineering, and financing costs, account for the remainder.)
But research from the Institute for Progress’s Brian Potter and Chicago Booth’s Chad Syverson finds that house-construction costs are likely not the primary culprit behind skyrocketing house prices. Looking at nearly 75 years of data, they find that changes in building costs have never been closely tied to house price growth overall, and that the link between the two has weakened further in recent decades.
Potter and Syverson analyzed the connection between building costs and US house prices from 1950 through 2024. They tracked construction costs using RSMeans Data, and to gauge house prices, they drew on multiple home-price indexes.
One notable pattern that emerged was the rate at which both costs and prices increased. Relative to the inflation measure known as the GDP deflator, the Consumer Price Index rose about 20 percent during the study period, whereas both home-construction costs and prices more than doubled.
Early in the postwar era, construction costs grew faster than housing prices. However, the rate of home-price increases began to outpace construction-cost rises in the late 1970s. Since 1975, cumulative house-price growth in the Federal Housing Finance Agency’s House Price Index has outpaced building-cost increases by at least 60 percent.
Where prices pulled away
Although home-price growth has consistently surpassed construction-cost growth in recent decades, the areas with the greatest disconnect between prices and costs have varied over time. In the early 1980s, the cities with the widest gap between price and cost growth were in the northeast, including Boston; New York; and Springfield, Massachusetts. By the early 2000s, the top five cities were all in California. Presently, Miami has the pole position, with price growth outstripping cost growth by 8.6 percent.
Potter and Syverson note that not only is there substantial turnover in the cities with the highest price growth relative to cost growth, but “faster relative price growth in one period predicts slower relative price growth in the following period, tempering cumulative differences between house prices and building costs” in any given metro area.
In earlier research with Booth’s Austan D. Goolsbee, Syverson documents stagnating construction productivity throughout the period of this divergence, which suggests that efficiencies in the construction industry have not contributed to the widening gap between costs and prices. In fact, the span from the mid-2010s to the present is the only period since 1950 that has seen both construction costs and house prices rising sharply—but prices have simply grown faster.
Though the research finds a clear disconnect between the growth rates of house prices and building costs, the causes for that decoupling are less apparent. It may have several drivers, Potter and Syverson conclude, including restrictions that prevent the housing supply from growing in high-demand areas.
- Austan D. Goolsbee and Chad Syverson, “The Strange and Awful Path of Productivity in the US Construction Sector,” in Technology, Productivity, and Economic Growth, eds. Susanto Basu, Lucy Eldridge, John Haltiwanger, and Erich Strassner, Chicago: University of Chicago Press, 2024.
- Brian Potter and Chad Syverson, “Building Costs and House Prices,” Journal of Economic Perspectives, Summer 2025.
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