As the Cost of New Homes Skyrocket, Who's Really Paying the Price?
Updated: Sep 11, 2021
The price of new homes is at an all-time high, and buyers and the workers building the residences are paying the price. Residential homebuilding companies are benefiting from a changed playing field resulting from the Covid-19 pandemic. Homebuyers are pressured to purchase in the face of skyrocketing costs while on the other end, workers are being exploited to meet the demands of the changing market, all while profits for the homebuilders have actually increased.
Exploited Workers on the Frontlines
With rising building costs and increased demand, homebuilders are cutting costs to deliver. A University of Massachusetts study reported that, “by not paying taxes on workers’ wages and by not contributing to workers compensation funds, contractors reduced their building costs by 30 percent.” KB Home and Lennar are two of the largest homebuilders in the country that allegedly use criminal contractors who utilize an underground economy to deliver higher profit margins.
"(They) operate largely in the shadows and are nearly untraceable in that they pay their workers in cash and do not keep any records of employment,” states a June 2021 report from the University of Massachusetts Amherst Labor Center. “This cash-only world is a hothouse for wage theft, a central feature of this business model.”
Now, coming out of the Covid-19 haze, residential homebuilding is reliant on an exploitable workforce to satiate hungry buyers and keep profits margins high.
BDN spoke with a worker who asked to remain anonymous on a Lennar site in California's Inland Empire about the changes he has been experiencing since the pandemic struck. "The reason we work residential is because we can't e-verify' (a system used by employers to check eligibility status). In the end, McDonalds' employees are making more than us. They don't have to spend $1000 on tools to go to work, they don't have to drive 50-100 miles for a job. But we have to take what we can get. They pay less now and they work us harder. The pay is never the same. They pay us what they want and we have no say. We have to work. we cant take off like others. I have to feed my family."
Another worker interviewed on a KB Home site said, "we were making the same wages 20 years ago and the houses were going for $120,000. We were actually able to buy the houses we were building. Now the houses are selling for $700,000- $800,000 and we're still paid the same. This past year the house prices have gone crazy, the material prices went crazy and the people in charge pay us less."
The Soaring Market Only Benefits the Top
This spring's staggering material costs (an April NAHB report estimated material inflation increasing home costs by an average of $36,000), soaring demand amongst homebuyers and pandemic related restrictions have created a dearth in home supply for all the major residential builders, which results in record profits.
Big Rentz Inc. reports that the number of nationwide building permits requested has seen a steady increase since 2015 and COVID-19 did nothing to thwart this trend. In fact an increase of 33% year-on-year is expected by the end of 2021.
In the last quarter, Lennar reported a 5% increase in average home sale prices while home orders rose 32% during the quarter. KB Home reported average home prices increasing by 13% while home orders increased a whopping 155% compared to the same quarter in 2020. These numbers push higher even as home supply has been dwindling.
The buying frenzy comes on the heels of the Covid-19 pandemic as homebuyers look to buy into the market as restrictions ease and things seemingly return to normal.
"If you list your house at a reasonable price you are going to get multiple offers and honestly most of them are way over asking, anywhere from $10,000 to $40,000 and $50,000 over. And I have even heard more," said Ted Jenkins of Windermere Real Estate Tower Properties.
Prospective buyers in California are now confronted with a housing market where 70% of homes sell above list price and the median time a house spends on the market is only one week, according to a California Association of Realtors report from May. Compared to May 2020, Los Angeles County home prices were 39% higher and sales were up 80%.
Profits Always Come First
In a statement to investors from KB Home CEO, Jeff Mezger, he says, “we are flexible in aligning our business to demand and building to our sales pace, mitigating inventory risk.... We have a long-tenured, hands-on team that is experienced in navigating changing market conditions, which will help guide our actions in this challenging environment.”
The "flexibility" Mezger may be speaking of is a result of there being little to no oversight in the residential homebuilding sector. Companies like KB Home and Lennar can cut costs through low wages and denial of benefits and on the other end, raise prices as they see fit. As new home orders increase moving into the second half of the year, homebuyers and the workers who build the homes will pay the price to ensure homebuilders' profits increase regardless of whether or not they build enough to match demand.