Rising Material Prices

by Joel Barkman

Barely beginning to emerge from the most devastating housing downturn since the Great Depression, home builders in the early months of this year have been confronted by a significant run-up in material prices.

According to National Association of Home Builders (NAHB) Senior Economist Bernard Markstein, Lumber prices are at their highest level since the first half of July 2006; up more than 26 percent from the start of this year.

Residential construction is the chief driver of demand for softwood lumber. With residential construction activity remaining at historically low levels, mostly supply-side factors are responsible for the dramatic surge in lumber prices in January and February:

Under the Softwood Lumber Agreement (SLA) between the U.S. and Canada that went into effect in the fall of 2006, Canada is subject to a complex set of export fees and quotas. Recent rulings against some Canadian provinces have added an extra 10 percent to their cost of exported lumber.
With the cost of lumber remaining for about two-and-a-half years, companies shut down many of their mills and cut back on logging operations by the second half of 2009, with significant layoffs of workers. This led to severe lumber supply constraints by the end of last year.
Unusually cold and wet weather in much of the southern U.S. and parts of Canada limited logging operations even further, helping to drive up prices.
Demand has increased from paper and pulp mills.
Given the cost and time involved in restarting mills, operators have been reluctant to ramp up production until they can be confident that higher lumber prices will prevail for an extended. Once a decision is made to reopen a mill, it can still take several weeks to service idled equipment and to rehire workers.
Some segments of the market - notably dealers - also temporarily nudged up demand as they moved to rebuild their depleted inventories. Working inventories had thinned in response to weak demand but also because of difficulties in obtaining adequate financing for them.

Overall, low levels of residential construction have been exerting downward pressure on building materials prices. This has been offset in some industries by suppliers reducing output in the face of soft demand and prices.

Home builders also have been receiving unwelcome news from their suppliers of late. An index produced by the Bureau of Labor Statistics that tracks building material prices for builders of single-family homes and multifamily structures has now risen three months in a row. In January, both measures jumped 1 percent from December.

Chief contributors to the recent rise are lumber, fuel products (gasoline and diesel), plumbing fixtures and copper prices.

On a year-over-year basis, the single-family index is up only 0.3 percent and the multifamily index is up a slight 0.2 percent. Nonetheless, with a number of countries around the world on the expansion path, building material prices are likely to continue to rise in coming months.

Among recent price trends in other building materials, as of January:

Gypsum (drywall) prices have generally been falling since February 2009 and are at their lowest levels since June 2004. However, both U.S. Gypsum and National Gypsum announced price increases in early January.
The copper market has remained characteristically volatile, with labor disputes in Chile and expectations for rising industrial demand globally pushing prices higher recently. Copper prices are up 63.5 percent from January 2009 to January 2010.
General global recovery is likely to produce higher steel prices in the latter half of this year and into 2011. All eyes will be on China. Chinese steel output is expected to rise rapidly in 2010, but Chinese demand for steel is forecast to rise even more rapidly, putting upward pressure on steel prices.
The rising share of costs for roof shingles may be due largely to changes in the price of asphalt. The U.S. Bureau of Economic Analysis show prices for asphalt shingles and coating materials increasing by more than 10% annually in 2005 and 2006, and by more than 18% a year in 2008 and 2009. The trend is expected to carry on into 2010.
Millwork, which is largely imported from South America, will also likely be on the rise. Manufactures in Chile will continue to struggle during the aftermath of the recent earthquakes.

"Given expected growth in world industrial demand over the next several years, particularly China, building materials prices will tend to rise faster than general inflation," explains NAHB Senior Economist.

Not to stall any meaningful economic recovery, I am urging my fellow association members on the supply side to take steps now. Adjusting inventories and beginning price negotiations now can ensure a more stable housing market moving forward.

I believe that some of our valued partners such as STOCK Building Supply and others are already doing just that.

How will increasing material prices affect your decision to build in 2010? Just "Ask a Builder."

As always e-mail your questions or comments to joel@goldenrulebuilders.com or write to "Ask a Builder" at P.O. box 294, Catlett, VA 20119.

Barkman is past president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

Read Joel's column weekly in the