The first quarter of 2018 brought significant inflation to the housing and construction sector, which could be the first undoing of the housing recovery after the Great Recession.
Since April 2005, Ro-Mac Lumber & Supply Inc. has provided a monthly Whole House Commodity Index free of charge to builders and industry leaders across the country. The Index is unique in that it charts the wholesale costs of structural building components to construct a 2,200-square foot home. By utilizing the wholesale prices, it gives builders a forward pricing glance of 30 to 45 days into the future.
Local builders, regional commercial contractors and Wall Street investors utilize the index. It is regarded as one of the most accurate market barometers in the sector. Although the index is at a record high, from mid-December to mid-March, it increased a whopping 7.4 percent. The inflation in that three-month period rivals the huge increases after major hurricane strikes.
Strong housing demand is not the primary factor creating this inflation. February housing starts were 7.0 percent below January and 4.0 percent below the prior year. New home sales in February were also unimpressive as they fell 0.6 percent from January and were only 0.5 percent more than the prior year. Consider this point – 2017 national housing starts finished 41.8 percent below the peak year of 2005, which is the same year the Index was started.
There are three factors driving the inflation train in the building material sector – tariffs, trucking and labor costs – in that order.
The new administration brought a wrecking ball to the trade agreements and while many support the new tough trade dealings, it is bad for the construction industry. The emerging markets of China, India and Africa are demanding increased construction resources, and the United States is not the driving force it used to be. The imposition of 20 percent tariffs on Canadian softwood timber, 25 percent tariffs on steel, and 10 percent tariffs on aluminum is creating havoc in the markets.
Importers are cancelling orders to the United States and material is being diverted to other areas of the world. Imported steel is the primary commodity for residential construction components and this will create a disproportionate effect on housing. Brokers of steel imports in the state of Florida are very concerned the summer will bring significant shortages and this could very well drive up pricing beyond the tariff amounts.
Tensions between the United States and Canada over the lumber tariffs and NAFTA are very bad, and it appears the Canadians are aggressively pursuing other buyers throughout the world. Lumber contracts for Canadian wood that were historically available to American lumber dealers are no longer being offered. Many lumber experts fear these prices are poised to increase considerably more once the Northeast thaws out from a rugged, snowy winter and early spring.
It is estimated that between 3 and 4 percent of the cost in all goods can be tracked back to trucking. New electronic log books for truck drivers along with driver shortages and much higher fuel costs this spring is busting transportation budgets across all sectors. Florida faces specific problems, because it consumes more than it produces, which leads to much higher trucking costs as many trucks have to deadhead back to their destinations.
Labor is bad for most industries. Increased wages along with a lack of skilled workers is pinching manufacturers who are struggling to keep up with improved demand. The supply- and-distribution chain was essentially destroyed during the Great Recession, and it simply lacks the people and infrastructure needed to support the moderate growth in construction. Concerns of a new recession in the next year or so is keeping a lot of money on the sidelines that would typically be invested in the sector. Memories of the disastrous 2008 housing collapse are too fresh.
Honestly, this is about as bad as it gets. There are real concerns for shortages and the fear might not be how much it costs but rather will I be able to get it? Builders who do not plan will be forced out of business and planned construction projects could bust budgets. Uncontrolled inflation and material shortages could quickly undo the progress housing made in the last few years, which would exacerbate an already terrible affordable housing market.
If you are planning any construction project, lock in pricing, plan well and order early. Most importantly, pray for a quiet hurricane season or the inflation and supply issues could be unimaginable.
This article provided by NewsEdge.
This article provided by NewsEdge.