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The Secular and Cyclic Behavior of "True" Construction Costs

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  • William C. Wheaton

    ()
    (Massachusetts Institute of Technology, Department of Economics, Cambridge, Mass 02139)

  • William Eric Simonton

    (Massachusetts Institute of Technology, Center for Real Estate, Cambridge, Mass 02139)

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    Abstract

    Current construction cost indices typically are derived by applying national weights to local costs for materials and labor. In this study, construction cost indices are developed that are based on actual contractor tenders for projects. As such, they incorporate full variation in factor proportions, as well as factor costs, contractor overhead, and profit. Cost indices are produced for two product types, office and multi-family residential, in six different MSAs using F.W. Dodge project cost data from 1967 through the first half of 2004. Standard ‘‘hedonic’’ analysis is applied to control for variation in project scale and features to extract the true time trends in costs for each market. The findings indicated that real construction costs generally have fallen slightly over the last 35 years. In addition, no correlation is found between costs and building activity. Causal (IV) analysis implies that the construction industry is elastically supplied to local real estate markets, with any ‘‘excess’’ profits going to land and developer entrepreneurship. This is consistent with the traditional ‘‘urban land economics’’ literature.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol29n01/01.1_26.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal journal of Real Estate Research.

    Volume (Year): 29 (2007)
    Issue (Month): 1 ()
    Pages: 1-26

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    Handle: RePEc:jre:issued:v:29:n:1:2007:p:1-26

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    References

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    1. Somerville, C Tsuriel, 1999. "Residential Construction Costs and the Supply of New Housing: Endogeneity and Bias in Construction Cost Indexes," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 43-62, January.
    2. Wheaton William C. & Torto Raymond G., 1994. "Office Rent Indices and Their Behavior over Time," Journal of Urban Economics, Elsevier, vol. 35(2), pages 121-139, March.
    3. Mark S. Coleman & Ralph Gentile, 2001. "Exploring the Dynamics of Building Supply: A Duration Model of the Development Cycle," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 21(1/2), pages 21-42.
    4. Simone Clemhout, 1981. "The Impact of Housing Cyclicality on the Construction of Residential Units and Housing Costs," Land Economics, University of Wisconsin Press, vol. 57(4), pages 609-623.
    5. Brown, James N & Rosen, Harvey S, 1982. "On the Estimation of Structural Hedonic Price Models," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 765-68, May.
    6. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    7. Cropper, Maureen L & Deck, Leland B & McConnell, Kenneth E, 1988. "On the Choice of Functional Form for Hedonic Price Functions," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 668-75, November.
    8. Palmquist, Raymond B, 1984. "Estimating the Demand for the Characteristics of Housing," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 394-404, August.
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    Cited by:
    1. Narayan Bulusu & Jefferson Duarte & Carles Vergara-Alert, 2013. "Booms and Busts in House Prices Explained by Constraints in Housing Supply," Working Papers 13-18, Bank of Canada.
    2. Steven Ott & W. Hughen & Dustin Read, 2012. "Optimal Phasing and Inventory Decisions for Large-Scale Residential Development Projects," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 888-918, November.

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