Why It’s Not Just About the Marble Kitchen

Housing prices are at an all-time high. According to the National Association of Realtors, the median existing-home sale price in the U.S. reached $429,400 in the second quarter of 2025.

Why do prices keep going up? It’s tempting to blame construction costs. After all, construction costs made up 64.4% of a newly-built home’s sale price in 2024, according to the National Association of Home Builders. However, according to a new working paper from the National Bureau of Economic Research, that’s far from the case.

“A lot of parties are likely responsible for high house prices, and our results show you can’t lay all the blame on builders,” explains Chad Syverson, an economics professor at the University of Chicago and co-author of the paper.

Don’t Blame the Contractor for Your Dream House Costs

The paper shows that there was only a weak correlation between building costs and house prices in the past. And over the past ten years, housing prices have completely decoupled from building costs.

“Contractors aren’t really to blame: they’re operating in a pretty competitive market, with not particularly high profit margins,” says Syverson’s co-author Brian Potter, a Senior Infrastructure Fellow at the Institute for Progress.

As you can see, the changes in building costs have not kept pace with the changes in housing prices since 2010.

How Housing Markets Broke Free From Construction Reality

According to Syverson and Potter, the main costs driving up prices are the cost of securing land and other legally related costs, such as permitting and zoning. Insurance is also becoming a hefty cost in certain locations.

“As land-use restrictions rose (and in some cities, as we built toward areas that are inherently more difficult to build on), land prices rose relative to construction costs. That was likely a big source of the cost-price divergence,” explains Syverson. “High land prices bite the most in already-built homes, not for new homes (for new homes, contractors actually try to keep their land prices low, around 20-25% of the total cost of a new home).”

“The question is, what explains land prices?” He asks. “Governments can matter. But the government isn’t some entity off in outer space. Governments and the rules they set are often influenced by existing local residents, who can have an incentive to create a system where it is hard to build new housing.”

The Bottom Line

Cities with high construction costs tend to have high prices, but the price variations within cities show that most of the high house prices are not due to things like materials and labor costs. Rather, it is tied to the price of land.

So, for future home owners looking to save on their dream homes, location may be the most important thing to consider.