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. We preach “back to basics,” rationalize floor plans, build faster, and discount harder, and when that still isn’t enough we invite our “vendor partners” to share the pain, which usually means sharing our margin. I’ve sat on both sides of that conversation. Here’s the uncomfortable part: most of what’s squeezing us right now can’t be fixed with a sharper purchase order.
The squeeze is real and it’s national. Material, labor, and financing costs are colliding with buyers who hit their affordability ceiling some time ago, after years of underbuilding and stubbornly high mortgage rates. Margins are thinner, timelines are longer, and managing risk now matters as much as managing the build. The bigger operators with scale have absorbed some of it; regional and mid-size builders — the people I spend most of my time with — are the ones struggling to keep production up. The result is the same undersupply we’ve been talking about for a decade, and continued pressure on prices, rents, and land.
Financing is the real chokepoint
The most immediate pressure isn’t lumber or labor — it’s the cost of money. Mortgage rates parked in the 6.5%–7.5% range have thinned the buyer pool, but the harder problem sits on our side of the ledger. Construction loans are mostly floating-rate, and as those rates reset upward they quietly erase the margin we penciled at kickoff. Lenders aren’t making it easier: private equity and banks want bigger reserves and tighter covenants, and the regional banks that used to be flexible have pulled back hard on liquidity. Carrying land, materials, and standing inventory costs more every month a project sits — which is why so many of us have gotten ruthless about which jobs we start, and when.3
Materials came down, but they didn’t come home
The supply-chain chaos of the pandemic is behind us; the prices never fully retreated. Lumber has mostly normalized, but steel, roofing, insulation, concrete, and electrical have not. Tariffs on Canadian lumber, Chinese steel, and imported fasteners keep injecting volatility into a market that was finally starting to feel predictable. Construction Dive recently reported that renewed materials spikes are pushing some owners and developers to delay or shelve projects outright.8 If you want the detailed version of the lumber side of this, my colleague Kip Fotheringham walked through it in The Fate of Canadian Lumber.
The labor shortage stopped being cyclical
The skilled-trades gap is no longer a seasonal gripe; it’s a structural fact. Carpenters, electricians, HVAC installers, masons — the experienced hands are retiring faster than apprentices are arriving, and too few young people are entering the pipeline to close the gap. I laid out the demographic and immigration forces behind this in The Changing Face of Labor.2 Federal money has made it worse for residential, not better: the Infrastructure Investment and Jobs Act (IIJA), CHIPS, and the Inflation Reduction Act (IRA) are pulling tradespeople toward higher-paying civil and industrial work. So residential wages are climbing faster than inflation, and we either pay up or wait longer for the same crews. The Home Builders Institute’s Fall 2024 labor report frames this as a lasting headwind on housing production rather than a blip — a read NAHB echoes in its own coverage.1,3
The code book and the fee schedule
Even when materials and labor cooperate, the code book and the fee schedule don’t. Energy mandates, stormwater rules, electrical updates, and impact fees routinely add tens of thousands of dollars to a single home, and in plenty of jurisdictions those fees have become a stand-in for property-tax revenue. NAHB’s Cost of Constructing a Home in 2024 puts construction at more than 60% of the average new-home price, with regulation and soft costs taking a growing bite; the association has long pegged roughly a quarter of a single-family home’s price to regulation.4 Zoning is the other choke point. HUD’s PRO Housing and related programs are pushing reform, but local implementation is slow and uneven, and density limits, parking minimums, and long entitlement timelines keep strangling the attainable product we most need to build. (I get into the fee side of this in detail in our companion piece, The Hidden Tax on Housing.)
Federal policy is talking out of both sides of its mouth
Washington isn’t sending one signal on housing; it’s sending two. HUD and Treasury are funding grants to encourage zoning reform and faster approvals. At the same time, budget uncertainty around affordable-housing programs and shifting regulatory interpretations put any project leaning on tax credits or federal financing at risk. The HUD Loans analysis of rising costs and affordable housing shows how higher construction costs blow holes in Low-Income Housing Tax Credit (LIHTC) deals that then need gap financing or another round of value engineering to pencil.7 For builders, federal policy is one more variable to underwrite, not a source of relief.
What builders are doing about it
So what do you do about structural costs you can’t negotiate away? The builders I work with are leaning on some mix of the following, and the good ones treat these as operating discipline rather than slogans:
- Product simplification. Fewer plans, fewer trim options, tighter material lists. Less exciting than it sounds, and it works — procurement gets simpler, waste drops, cycle times shorten.
- Land-light development. Lot-option contracts instead of owning dirt, so you’re not carrying the interest while you wait out entitlements.
- Offsite construction. Modular, panelized, and factory-built components to take labor and weather risk off the jobsite.
- Value engineering. Substituting materials and rethinking design for cost and performance rather than chasing custom for its own sake. This is most of what we do, so I’m biased — but it’s also where the recoverable margin usually hides.
- Smaller footprints, more density. Townhomes and attached product to keep the price per front door inside what buyers can finance.
- Vertical integration. Pulling mortgage, title, and even materials supply in-house to defend margin across the chain.
For the outside view, Commerce Bank’s 2025 construction report and Ken Simonson’s NAIOP piece on costs shifting from materials to labor both track how builders are reshaping product, procurement, and partnerships to get through this.5,6
The contracts have changed to match
The paperwork tells the same story. Materials price-escalation clauses and supply-delay language are standard in our contracts now, and force majeure gets invoked far more often than it used to — permitting holdups, failed inspections, supply gaps. On the affordable-housing side, the lawyers are working at the intersection of federal tax-credit law, local inclusionary zoning, and the new federal grant programs, while cities scramble to update ordinances so they qualify for “pro-housing” money instead of getting left out when it’s handed out.
What I tell builders to expect
Headline inflation may keep cooling, but the things squeezing us — labor scarcity, regulation, financing costs — are structural and won’t resolve on their own. If rates ease late in 2025 or into 2026, that buys some breathing room. The durable fix requires federal, state, and local policy to actually line up, and I’m not holding my breath. None of us can solve affordability alone. Until the policy side catches up, the job is the one we’ve always had, just harder: keep homes moving while underwriting a level of cost volatility that isn’t going to settle anytime soon.
References
- Home Builders Institute. (2024). Fall 2024 Construction Labor Market Report. hbi.org
- Levinson, M. (2025, November 3). The Changing Face of Labor. So-lu-tions.com. so-lu-tions.com
- Home Builders Institute & National Association of Home Builders. (2025, October 10). HBI Report Reveals Economic Impact of Labor Shortages on Housing Production. NAHB. nahb.org
- National Association of Home Builders. (2025, January 20). Cost of Constructing a Home in 2024. NAHB Housing Economics PLUS. nahb.org
- Simonson, K. (2023, Fall). Construction Cost Challenges Shift from Materials to Labor. Development Magazine, NAIOP. naiop.org
- Commerce Bank. (2025, August 11). U.S. Construction Industry Report. commercebank.com
- Hamann, J. (2022, May 30). Rising Construction Costs’ Affordable Housing Impacts. HUD Multifamily Loans Blog. hud.loans
- Obando, S. (2025, September 11). “There Is a Limit”: Rising Materials Costs Test Construction’s Breaking Point. Construction Dive. constructiondive.com
My name is Mark Levinson, Managing Partner at MLS.
Managing Partner at MLS.
Let's have a conversation about proactive solutions that will feed your bottom line.
