Don’t Expect Huge Price Drops in Construction Quickly
As summer comes to an end, the inflationary picture continues to moderate overall, and many wishful new home buyers and remodelers are sitting on the sidelines believing that within the next few months there will be a significant price capitulation in construction cost. Unless the fundamentals in the construction industry change quickly, that may truly be more of a hope than reality.
Since April 2005, RoMac Building Supply has been publishing the Whole House Commodity Index free to builders and contractors across the country. This index charts the actual wholesale structural supply costs from the foundation to the roof top to build a 2,200 square foot home in Lake County. This is seen by many in the industry as one of the best and most accurate forecasters of actual construction costs because it charts pricing at the wholesale level which give builders a forecast of pricing for the next 30 to 45 days. The Index does not include labor, décor, plumbing, electrical, and HVAC but experience indicates these markets somewhat follow the complete direction of other sectors.
For mid-August, after 4 months of decline, the RoMac Building Supply Whole House Commodity Index increased 3.3 percent as core wood commodities seemed to have hit a bottom and in fact, those markets are firming. The wood commodity markets have masked the overall inflationary picture which has hit the building material sector due to much higher energy, trucking, and labor costs. The other key fact about this report is that the costs on it are 27 percent more than the previous year, and in the fall, prices made a significant price run up.
There are four main reasons why price capitulations in the construction industry will be very slow to occur, especially in Florida:
Nationally, and more so in Florida, there is a true housing shortage from a decade of under building. At some point, despite higher interest rates, a new normal and acceptance of these rates will occur, and people will enter the markets. Plus, the significant number of cash buyers in Florida creates a different demand equation.
The overall economy and inflation picture is improving in late summer, and the rally on Wall Street, if it continues, will boost consumer sentiment. Lower gas prices are fuel for the housing industry.
Overall, commodity and raw material prices remain strong, and while not at the record levels in the spring, these markets are far from historic bottoms.
Probably the biggest factor is labor costs. While talk of recession is debated, one aspect does not say recession at all - the red-hot labor markets. With unemployment at 3.6 percent, wages going up, and millions of job openings remaining unfilled that undercuts any real recession arguments. In the construction industry, labor costs are one of the biggest drivers of pricing at all levels due to the less reliance on technology.
Finally, the costs of land and government building and impact fees are not going down. In fact, the Lake County Board of County Commissioners are proposing to increase impact fees to the maximum level allowed by the state.
There are a couple of wildcards that will probably add to the pressure of costs in the construction industry. The first, and potentially most sudden, would be a couple of intense hurricanes striking the United States in September or October. Through mid-August, it has been quiet, but it only takes a couple of storms. Longer-term is the push by the Federal and State governments to address housing affordability. It appears affordable housing programs maybe the focus of next year, and no one disagrees this huge problem must be addressed.
So, if you are sitting on the sidelines for huge drops in construction costs, my advice is to get a comfortable chair and a good book, this could be a while.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc., and he is also the host of the “Around the House” Show which can be seen at AroundtheHouse.TV.