Rising Construction Costs: Are Builders Winning the Fight in 2025?
Builders are fighting back to reduce hard costs—or at least that’s what we tell each other. With a “back-to-basics” mindset, we rationalize options, build faster, and discount harder. We find ourselves inviting our “vendor partners” to share in the pain, or at least in our reduced margins.
Across the United States, homebuilders are feeling the squeeze. Rising material, labor, and financing costs are colliding with buyers who have reached affordability limits after years of underbuilding and persistently high mortgage rates. The result is a market where profit margins are thinner, project timelines are longer, and managing risk has become just as essential as managing construction.
While some builders have adapted with scale efficiencies, others—particularly regional and mid-size operators—are struggling to sustain production levels. The broader consequence is a persistent undersupply of new housing units, along with continued upward pressure on prices, rents, and land values.Financing: The Tightest Squeeze
The most immediate pressure point remains financing. Mortgage rates hovering near 6.5%–7.5% have dampened buyer demand, but the cost of capital for builders has risen even faster. Short-term construction loans—usually floating-rate—are adjusting upward, threatening project feasibility. Private equity and banks now require higher reserves and tighter covenants, while liquidity from regional lenders has sharply contracted. This environment drives up the cost of carrying land, materials, and inventory, forcing builders to be more selective about which projects they start and when they start them.3Materials: Stabilized but Still Elevated
Although pandemic-era supply chain bottlenecks have eased, construction materials remain structurally more expensive than before 2020. Lumber has partially normalized, but steel, roofing, insulation, concrete, and electrical components have not. Tariffs on Canadian lumber, Chinese steel, and imported fasteners continue to add volatility to an already stressed market. Recent reporting from Construction Dive highlights how renewed spikes in materials pricing are testing the limits of what owners and developers can absorb before delaying or cancelling projects.8Labor: Scarcity Becomes Structural
The skilled-trades gap has deepened across the country. Carpenters, electricians, HVAC installers, and masons remain in short supply as older tradesmen retire and too few apprentices enter the pipeline. For additional context, see Mark Levinson’s analysis, The Changing Face of Labor , which details how demographic shifts, immigration policy, and subcontractor consolidation are reshaping the construction workforce.2 Federal infrastructure spending—through initiatives like the Infrastructure Investment and Jobs Act (IIJA), CHIPS, and the Inflation Reduction Act (IRA)—has further tightened the labor pool by drawing workers into higher-paying civil and industrial projects. As a result, wages in residential construction are rising faster than inflation, and builders must either pay more or wait longer for the same crews. The Home Builders Institute (HBI) Fall 2024 Construction Labor Market Report underscores this dynamic, finding that labor shortages remain a structural headwind for housing production even as overall job growth fluctuates, a theme reinforced in NAHB’s coverage of the economic impact of labor shortages on housing production.1,3Regulation and Red Tape
Even as materials and labor contribute to rising costs, evolving building codes and local regulations are adding new layers of expense. Energy efficiency mandates, stormwater standards, electrical codes, and impact fees can add tens of thousands of dollars per home—particularly in localities where fees substitute for constrained property tax revenue. The National Association of Home Builders’ study, Cost of Constructing a Home in 2024 , shows that construction costs now account for more than 60% of the average new-home price, with regulatory and soft-cost burdens taking an increasing share. NAHB has long estimated that roughly a quarter of the cost of a single-family home can be attributed to regulation.4 Zoning restrictions remain another choke point. Despite federal initiatives such as HUD’s PRO Housing and Pathways to Removing Obstacles to Housing programs, implementation at the local level is slow and uneven. Density limits, parking minimums, and long entitlement timelines continue to constrain supply in high-demand markets, limiting builders’ ability to deliver smaller, more attainable product.Federal Policy: Mixed Messages
Federal housing policy in 2025 sends conflicting signals. On one hand, HUD and Treasury support grant programs to encourage zoning reform and streamline development approvals. On the other hand, budget uncertainty for affordable housing programs and shifting regulatory interpretations create risk for projects dependent on tax credits or federal financing. The HUD Loans blog on rising construction costs and affordable housing impacts documents how higher construction costs strain Low-Income Housing Tax Credit (LIHTC) deals and other subsidized projects, often requiring additional gap financing or value engineering.7 Meanwhile, efforts to streamline environmental and fair-housing reviews have aimed to speed approvals, but they may also create new legal uncertainty—especially for projects that rely on legacy compliance frameworks tied to federal grants or tax credits. For builders, the policy environment feels less like a tailwind and more like a shifting cross-current.Builders’ Strategic Response
Facing these structural cost pressures, builders are pursuing a mix of survival and innovation strategies:- Product simplification – Streamlining floor plans, trim options, and materials to control procurement, reduce waste, and shorten cycle times.
- Land-light development – Using lot-option contracts instead of land ownership to reduce capital exposure and interest carry.
- Offsite construction – Increasing use of modular, panelized, and factory-built systems to improve labor efficiency and reduce weather-related delays.
- Value engineering – Substituting materials and optimizing design for cost and performance, not pure customization.
- Smaller footprints and higher density – Moving toward townhomes and attached product to maintain affordability per front door.
- Vertical integration – Expanding into mortgage, title, and materials supply to protect margins across the value chain and offer buyers more bundled solutions.
Legal and Policy Implications
Legal frameworks are also evolving in response to the cost crisis. Contract clauses addressing materials price escalation and supply delays are now standard. Builders are invoking force majeure provisions more often amid permitting, inspection, and supply disruptions. Affordable housing attorneys are navigating a growing intersection of federal tax credit law, local inclusionary zoning, and new federal grant programs. At the same time, local governments face pressure to revise zoning ordinances to qualify for federal “pro-housing” incentives and avoid being left behind when funding is allocated.The Outlook: Volatility Is the New Normal
While headline inflation may moderate, structural cost factors—labor scarcity, regulation, and financing—are likely to persist. Modest relief could come if interest rates ease in late 2025 or 2026, but long-term solutions require coordination across federal, state, and local policy. Builders cannot resolve housing affordability on their own; policy coherence is essential. Until then, they will continue constructing in a climate defined by volatility—building homes, but also continuously navigating risk, regulation, and rising costs.
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References
- Home Builders Institute. (2024). Fall 2024 Construction Labor Market Report. Available from Home Builders Institute
- Levinson, M. (2025, November 3). The Changing Face of Labor. So-lu-tions.com. The Changing Face of Labor
- Home Builders Institute & National Association of Home Builders. (2025, October 10).
HBI Report Reveals Economic Impact of Labor Shortages on Housing Production. NAHB. HBI Labor Market Report - National Association of Home Builders. (2025, January 20).
Cost of Constructing a Home in 2024. NAHB Housing Economics PLUS. Cost of Constructing a Home in 2024 - Simonson, K. (2023, Fall). Construction Cost Challenges Shift from Materials to Labor.
Development Magazine, NAIOP. NAIOP Development Magazine - Commerce Bank. (2025, August 11). U.S. Construction Industry Report: An Inside Look at How Companies
Are Adapting to the Current Market. Available at U.S. Construction Industry Report - Hamann, J. (2022, May 30). Rising Construction Costs’ Affordable Housing Impacts. HUD Multifamily
Loans Blog. Available at HUD Loans Blog - Obando, S. (2025, September 11). “There Is a Limit”: Rising Materials Costs Test Construction’s Breaking Point.
Construction Dive. Available at Construction Dive
