From: The Philadelphia Inquirer
3/27/05
By Alan J. Heavens
Inquirer Real Estate Writer
In spring, a lumber-mill operator's fancy turns to thoughts of the profits to be made as construction and remodeling season gets into full swing.
The same thoughts fill the heads of just about every provider of products consumed by the building industry each year.
Concrete, lumber, bricks, insulation, stone, steel and plastic (for vinyl siding) are used in great quantity in every new house and renovation job. Shortages and price increases affect everyone, from the major builder down to the weekend do-it-yourselfer.
Michael Carliner, an economist with the National Association of Home Builders (NAHB), says that whether material costs increase this year or not, builders probably will raise their prices.
"Most new homes these days are pre-sold, so last year's prices were based on what builders thought would happen, and they ended up getting squeezed," Carliner says.
The NAHB estimates that material prices boosted the cost of building a house by $5,000 to $7,000 last year. "This year, many builders are building a contingency factor into the sales contracts, although we don't think the increases in material costs will be as great as in
2004," Carliner says.Why? Because the residential-construction industry is anticipating a slight drop in the number of housing starts this year. There is a growing belief among economists that 30-year fixed mortgage rates will increase enough in 2005 to reduce sales.
Economists had predicted that for 2004, as well, but long-term rates declined further, boosting new- and existing-home sales to record levels.
Some builders remain willing to bite the bullet.
"We have no contingency clause in our contracts," says Gary G. Schaal, vice president of sales and marketing for Orleans Homebuilders, the region's fourth-largest builder. "We do a good job pricing, and we should get the houses done in the time allotted by the contract to keep costs in line.
"If we don't, shame on us."
According to February's Producer Price Index, released Tuesday, prices for concrete products rose 1 percent last month. The price of steel dropped 0.2 percent in February from January; lumber rose 6.1 percent; and asphalt rose 3.2 percent.
Compared with February 2004, the price of steel was up 37.7 percent; concrete products, 9.4 percent; lumber, 10.8 percent; and asphalt, 6.3 percent.
Area builders interviewed say there is a shortage of masonry products, bricks, concrete products, and oil-based products such as vinyl for siding and pipes, asphalt for roads and driveways, and roof shingles.
The price of oil also factors into transportation costs. Some major builders, such as Toll Bros., have regional centers supplying materials to job sites, to reduce transport costs.
Drywall prices remain high, although supplies continue to be adequate, area builders say. The typical 2,272-square-foot new home uses about
8,100 square feet of drywall for walls and ceilings.In the fourth quarter of 2004, gypsum wallboard manufacturer U.S. Gypsum reported a 25 percent price increase over the fourth quarter of
2003, for an average price of $132.02 per thousand square feet.Gypsum wallboard profit margins improved despite higher energy and waste-paper costs. Company chairman William C. Foote said the higher prices reflected strong demand.
The wallboard industry as a whole was producing at 90 percent of its capacity to meet that demand. Some experts believe prices will increase 15 percent in 2005.
There continue to be shortages of brick, especially in the South, where home builders use 33 percent of the 6.4 billion bricks produced for residential construction nationwide in a typical year, according to the Brick Industry Association. By comparison, the mid-Atlantic region uses just 4.1 percent of the brick produced annually.
Demand for brick has been increasing since 1999. Industry consolidation has reduced the number of plants over the years from
3,000 to 204, but a new factory can produce higher volumes than the older ones.Still, because brick factories once could be found in just about any part of the country, fewer plants mean that transportation costs are more of a factor.
Demand for lumber appears lower and prices seem to be easing, at least for now. Random Lengths of Eugene, Ore., which tracks lumber prices, reports that prices of both framing lumber and sheathing (plywood and oriented strand board) have decreased a bit in the last few weeks.
"The delivery price for six months from now is lower than today's price," the NAHB's Carliner says, acknowledging that there is "still some upward pressure on wood."
Lumber is the biggest factor in the price of residential construction, since the typical new house eats up 13,837 board feet of framing lumber and 13,118 square feet of sheathing.
Random Lengths' composite price for framing lumber (also known as dimensional lumber) is $420 per 1,000 board-feet, compared with $392 a year ago. But that price reflects a recent drop of about $8.
The composite price for sheathing is $444, compared with $583 per
1,000 board-feet a year ago, Random Lengths reports.Rising concrete prices are worrisome, because, as Marshal Granor of Granor Price Homes says, "we like to build basements."
The Portland Cement Association, which represents the nation's major producers, says that their prices aren't responsible for boosting home costs.
Concrete costs represent slightly more than 4 percent of estimated overall home-construction costs and less than 2.5 percent of the price of a new home on the market, estimated by the Census Bureau at $274,200, says Ed Sullivan, the association's chief economist.
Moreover, he says, concrete has experienced a real price increase of
0.1 percent during the last four years, after discounting for inflation.Carliner, of the NAHB, says cement and steel shortages are more a reflection of global demand than just U.S. consumption.
"China has been a central factor in the shortage of steel and cement, but the government there has been trying to slow down construction to rein in the economy," he says.
Steel doesn't play much of a role in residential construction here, other than in the production of appliances. But with the U.S. economy beginning to heat up, Carliner says, there's bound to be more commercial construction, and concrete and steel availability may become problematic.
Rebuilding from last year's hurricanes and the damage they wrought in Florida raised some concern that there would be major shortages of concrete products - of which Florida imports a huge amount - and that prices would be affected.
That hasn't occurred.
"What happened," Carliner says, "was that the hurricanes put a lot of projects on hold - until after the roofs were replaced on a couple of hundred thousand houses."
-------------------------------------------------------------------------------- Contact real estate writer Alan J. Heavens at 215-854-2472 or snipped-for-privacy@phillynews.com. Read his recent work at
Tom Watson - WoodDorker tjwatson1ATcomcastDOTnet (email)