by Lew Sichelman
Realty Times

The cost components of a typical house haven't changed much over the years -- the finished lot accounts for 20-25 percent of the price; labor and materials, roughly 50 percent, and the rest in financing and "other"costs such as overhead, sales and profit. But within each category, things have changed quite a bit.

The price of land has risen considerably, for example. But the share of total cost land represents has held fairly steady at 23-24 percent because larger houses have been built on smaller lots, explains Michael Carliner, an economist at the National Association of Home Builders.

The cost of labor is way up, too, though it is tough to say exactly how much because most of the work is done by subcontractors who often supply materials as well as labor. Even as the cost of materials has risen of late, however, hard costs have remained fairly even at 30-32 percent for materials and 20-22 percent for labor, according to the NAHB's price comparisons.

It is within the "other" category where the mix has really shifted. Here, financing costs are way down. And profits are way up.

Of course, financing is cheaper for buyers as well as builders. But the change has been far more dramatic for them than it has been for us.

In the early 1980s, when rates on construction loans soared to 20 percent and higher and many builders were paying fees to ensure their customers could secure permanent loans, the cost of financing overall to the builder was 15-16 percent. Nowadays, according to NAHB's member surveys, financial represents only about 2 percent of total costs.

Profits always soar when times are good, and the last few years have been no exception, Carliner found. In 1996, the average pretax profit margin of nearly 20 of the nation's largest public builders was 6.7 percent, according to their financial statements. But in 2002, their average margin was up to 10.7 percent and heading higher.

The NAHB economist theorizes that part of the strength in profits results from capital gains on builders' land holdings. Finished lots are simply worth far more by the time the house is ready for delivery than they were when the builder acquired them, he explains.

Under that hypothesis, if a builder has held the ground for any substantial period, his gains probably have been huge. And they could have been even larger had someone figured out a better way to erect these things we call home.

"Even with new tools and some components that require less onsite labor for installation, home builders have not achieved the improvements in labor productivity that have occurred in other industries," Carliner laments.

"Producers of building materials have succeeded in reducing labor requirements in their plants, but have not done much to create products that reduce labor requirements on the job site."

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