In 2021, thousands of homeowners declined to renovate their homes because of the rising cost of remodeling. They hoped that as the economic shockwaves from COVID-19 settled, the cost of construction would come back down. Now, a year later, remodeling costs have already increased over 12% in 2022. Suddenly, the 2021 prices don’t look so bad.
Our team at Lamont Bros. knows how frustrating the rising cost of construction can be for hopeful homeowners wanting to remodel. It can often feel like a risky decision to renovate your home when construction prices are on the rise. This begs the question — Why have remodeling costs increased so much in 2022?
This article aims to discuss the factors currently contributing to the rising cost of remodeling. The more you understand the economic patterns driving these trends, the more confident you can be in deciding whether now is the right time for you to remodel your home. In this article, we will discuss:
Rising material & labor costs
Remodeling costs are most closely linked to the costs of materials and labor. In 2021, shortages of lumber, paint, and pipe resins made national headlines. General construction material costs increased by 20.4% year over year. Though not as severe, 2022 Has seen its own volatile trends in prices. Namely, lumber, steel, and labor contributed to the rising costs of materials.
Skyrocketing Lumber Prices 2: The Sequel
When the cost of lumber stabilized in the summer of 2021 after record-setting prices, many hoped that would be the end of it. These hopes were dashed when lumber futures rose again from $485 per 1000 board feet in August to over $1400 per 1000 board feet in March of 2022. Since March, lumber prices have steadily declined and currently sit around $655 per 1000 board feet.
Although lumber prices have come back down, they have stabilized around 25-30% of pre-pandemic numbers. The volatile price patterns also make it difficult for contractors to adjust their costs accordingly. As a result, remodeling costs are unlikely to follow the same downward trends of lumber prices for now.
While steel isn’t frequently used in residential construction, its cost does affect the overall cost of construction materials. This, in turn, affects the cost of remodeling construction.
Due to the ongoing Russia-Ukraine conflict, steel prices have also seen a sharp increase. Both Russia and Ukraine are two of the world’s top exporters of iron, which is a key ingredient in making steel. When the conflict began, shipments out of both countries slowed significantly, setting off a chain reaction in the global construction industry.
Steel prices rose by over 200% in 2021 as a result of COVID-19. Prices peaked in August of 2021 and appeared to be headed back down to pre-pandemic levels until the Ukraine conflict. Beginning in late February, steel prices rose 25% over two months. After peaking in mid-May, steel prices appear to once again be on the decline. However, the US Government passed the Infrastructure Investment & Jobs Act in 2021. This massive infrastructure bill has many experts speculating that steel demand could increase prices over the next several years, once again raising remodeling costs by the end of 2022.
Unmet labor demands
Ask any employer about the challenges they’ve faced in the last 2 years, and most will tell you that labor is one of the big ones. Construction is no exception to the rule. The American construction industry currently faces a shortage of 650,000 workers. This presents several challenges to construction companies competing with one another to find and hire skilled laborers.
Think about it like this: to produce high-quality builds, a contractor must employ craftsmen who can do high-quality work. When demand for workers is high and supply is low, skilled laborers have a lot of options, and their employment goes to the highest bidder. In other words, construction companies are paying their workers more to attract and retain good employees.
In the last year, construction workers in the Portland-Metro area have seen their wages increase by 6%. This comes as a result of construction companies needing to fill labor positions to keep up with construction demand.
Housing market growth
Although remodel construction functions differently than new home construction, the principles that affect price are still linked together. The increasing home values also increase the value of the material and labor required to make homes. So, when prices grow in one subcategory of construction work, all other categories usually follow the same trend.
Over the last year, home values in the Portland-Metro area have risen by 19.4%. If you track the cost of remodeling over the same period of time, the percent change is strikingly similar. The good news is that even homeowners who purchased their house within the last year now have a significant amount of equity. Rather than sell the home and move, many homeowners instead choose to leverage this equity and add value to their home by remodeling. The issue with this trend is the increased demand for remodeling contractors further drives up the general cost of remodel construction.
Zillow Home Value Index – Portland Metro Area
Record-setting oil prices
One of the defining factors of the global economy in 2022 has been the tremendous cost of oil. The cause of this economic trend is hotly debated, but most experts agree that the current situation is the result of a “perfect story” scenario.
During COVID-19, fewer people traveled for work or leisure. Many office workers stopped making the morning commute and instead worked from home. Not wanting to risk exposure to the coronavirus, families forewent out-of-town vacations. Now that most restrictions are lifted and COVID-related deaths are declining, people are traveling again, increasing the oil demand.
At the same time, Russia’s invasion of Ukraine put a huge dent in the world’s oil supply. As the world’s 3rd top producer of crude oil, Russia holds a lot of power in the global oil market. When the invasion of Ukraine began, many economists feared that the conflict would result in a decline in the oil supply. Basic economic principles tell us that when demand is high and supply is low, the cost of a product increases.
Construction site vehicles & equipment
So why does this matter? Simply put, the cost of oil affects nearly every aspect of a remodel. With oil prices on the rise in 2022, remodeling costs are doing the same. Your construction team probably drives a company rig to haul their tools and building supplies around. When a remodel requires heavy machinery, such as a crane, concrete truck, or excavator, that’s even more gas. If your build team is working outside, they likely use a gas-powered generator to run their tools. When the cost of transportation goes, up, so does the cost of remodeling.
Then, there’s the issue of shipping. Many of the supplies for a remodel have to be shipped in from overseas. Whether they’re transported by plane, ship, or truck, higher oil prices always increase the cost of shipping. Couple that with the ongoing supply chain woes that started in 2020, and it starts to make sense why overseas shipping has increased 144% on some shipping routes.
The cost of fuel makes up between 20-60% of shipping costs depending on the mode of transportation. As a result, most shipping companies are increasing their fuel surcharge. For ground transportation in the US, this surcharge is currently about 15%.
Plastics and resins are used frequently in construction. The pipes that carry your water and sewage are made of PVC, a resin-based material. Waterproofing membranes for showers are usually plastic. Even quartz countertops use a resinous material to bind the rock particles together.
Unfortunately, plastic and resin both have one big thing in common: their primary ingredient is petroleum, which is derived from oil. That’s right, the cost of oil is probably even going to increase the cost of your plumbing pipes. Petroleum-based products have not yet seen as drastic of price increases as oil and gas, but they are currently on the rise and are expected to continue on that path.
One of the most influential factors that affect remodeling costs is economic inflation, of which we have seen quite a bit in 2022. It indiscriminately drives up the cost of everything from nails to concrete. Unfortunately, the world has experienced rapid inflation since the onset of COVID-19.
The Consumer Price Index (CPI) measures the change over time for common goods and services purchased by the average consumer. Increases in the CPI reflect higher costs of living and often indicate high rates of inflation. Over the last year, the CPI has risen by over 8%. That’s nearly 5 times the average increase of 1.7% from the previous 10 years.
So why does inflation matter? Inflation is representative of a decline in the value of currency. When inflation increases, the value of the dollar decreases. In other words, higher inflation means you have to spend more dollars to get the same value of product. Remodeling is no exception to the rule. As the value of the dollar diminishes with inflation, the same kitchen remodel that cost $80,000 pre-COVID would cost about $110,000 today.
Consumer Price Index (CPI) 10 Year Report
Should I wait for prices to go back down before remodeling?
Many homeowners think that if they wait for prices to go down, they’ll get a lower price on their remodel. In reality, the decision to wait usually just means a higher remodel price down the road and a missed investment opportunity.
Historically, housing and remodeling prices rarely go down and never stay down. Even the housing market crash of 2008 — when home prices nationwide dropped by over 30% — didn’t last long. Within 4 years, the market began to recover, now 14 years later, the average home is worth 57% more than pre-recession values.
Therefore, it is more accurate to say that while the rate of increase will eventually slow, it is highly unlikely that remodeling costs will go back below what it was at the start of 2022. In fact, Zillow currently estimates that the housing market will grow another 11.6 percent over the next year. If remodeling costs follow suit as they typically do, you can expect a home remodel to be more than 10% more expensive by this time next year.
When you remodel your home, the immediate cost recouped is between 50-80% of the total remodel cost. Keep in mind that the value added to your home by remodeling grows as your home increases in value. As a result, compounding interest can turn a remodel into a profitable investment. Lamont Bros. uses a remodel investment calculator to show how a home’s value increases over time, both with and without a remodel. Enter your home’s current value and your proposed remodel budget to see how to optimize your remodel from an investment perspective.
Ready to stop waiting and start remodeling?
Now that you understand some of the factors that are contributing to the rising cost of remodeling, do you feel more comfortable deciding for your home? To continue your research on remodeling, start learning about the different types of contractor options available. You can learn all about the design-build approach to remodeling right here on our website.
Want to talk to a professional remodeling design team about your home? We’d love to chat with you! Click the button below to schedule a free design consultation with one of our design consultants. We’ll walk you through the process of remodeling from start to finish.