Building Costs are Rising

The costs of lumber and building materials are rising and creating challenges for appraisers in new construction assignments. And while builders are feeling that impact, it’s very likely that cost increases are not yet seen in closed market transactions.

How Does This Impact Appraisals?

Coming sales contracts for some new constructions may begin to reflect these cost increases and appraisers may feel pressure to support prices that may be in excess of market support. To fully analyze these assignments, it is important for appraisers to remember that they can broaden the scope of their development of value to include a cost analysis (cost approach) and a market conditions analysis. When sales data is not available from comparable properties, other evidence of shifting market conditions may be available, including:

  • general market inventory
  • new construction starts
  • listing prices
  • pending sales
  • exposure time
  • number of available or competing properties

How Can Appraisers React?

Until market sales begin to recognize the increased materials costs, time adjustments can be extracted from sales and resales in the immediate subject market. Additionally, analysis of general price trends and volume of real estate activity can possibly help appraisers recognize and support some of the cost increase represented in the sales price. While builders understand that cost and value are not always synonymous, additional tools may be available to appraisers now to help make an appropriate analysis of increased cost in the construction process.