Building Materials Cost

From: The Philadelphia Inquirer

3/27/05

http://www.philly.com/mld/inquirer/classifieds/real_estate/11211557.htm

BUILDERS' BLUES

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."

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Contact real estate writer Alan J. Heavens at 215-854-2472 or
[email protected]. Read his recent work at
http://go.philly.com/alheavens.

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