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VOL. 10 | NO. 8 | Saturday, March 08, 2014

Cost Crunch

Fluctuating material prices pose challenge to contractors, homebuilders

By Amos Maki

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The aftermath of the housing crash and economic recession produced a roller coaster of changes in construction costs, one with more peaks than valleys.

Nationally, prices for structural steel dropped 0.2 percent in February, keeping prices level with a year ago, according to Engineering News-Record, which publishes price indexes that are widely used in the construction industry.

(Memphis News/Andrew J. Breig)

And local construction industry officials and homebuilders say they’re still struggling with fluctuating prices for materials.

Justin Grinder, vice president of Grinder, Taber & Grinder, said the wild swings in materials costs the industry witnessed in recent years have begun to settle down, although prices for many materials remain high.

“Certain items have gone up and certain items have gone down,” Grinder said. “We’re not seeing the spikes we did a few years ago.”

Nationally, prices for structural steel dropped 0.2 percent in February, keeping prices level with a year ago, according to Engineering News-Record, which publishes price indexes that are widely used in the construction industry. Cement prices jumped 1.7 percent in February, helping push concrete prices 2.7 percent higher than they were a year ago.

The price fluctuations have caused developers that had projects shelved because of the recession to re-evaluate prices on the projects they’re considering bringing back to the market.

“If your project was priced several years ago, that pricing structure has completely changed,” Grinder said.

Homebuilders said they are still wrestling with hefty price increases for everything from lumber to drywall.

Builders said they are still wrestling with hefty price increases for everything from lumber to drywall.

(Memphis News/Andrew J. Breig)

Average gypsum prices in 2013 were 16.6 percent above 2012 levels, which were 14.1 percent above 2011 levels, according to the National Association of Home Builders. The 67 percent rise in framing lumber prices from their housing bust lows has been reduced to 54 percent, but prices are still at 89 percent of their housing boom peaks. The 151 percent rise in Oriented Strand Board prices has been reduced to 124 percent, but prices are still at 62 percent of their peaks.

“We’re still seeing price increases,” said Kim Grant Brown, president of the West Tennessee Home Builders Association and owner of Kim Grant Homes LLC. “Beginning in January of last year we started getting hit with them constantly. I think with suppliers the prices were repressed for so long and now they’re seeing homes sell across the country and they want to get their piece of the pie.”

The Producer Price Index for inputs to construction, an average of the cost of all materials used in construction plus items consumed by contractors, such as diesel fuel, rose 1.3 percent year over year in 2013, the smallest yearly increase since 2009, according to the Bureau of Labor Statistics.

Rising petroleum costs also are driving up the price of construction plastics, such as PVC pipes and roofing materials like shingles.

“Anything that uses a fuel source to make it, all those things have seen tremendous increases,” said Charles Morgan of Vintage Home LLC.

For the second year in a row, the largest annual PPI increases among construction materials were for gypsum products, which were up 16 percent in 2013, and lumber and plywood, which was up 9.7 percent in 2013.

Morgan said builders have passed along some, but not all, of the price increases to consumers. The pricing crunch, combined with what Morgan described as less than favorable valuations from appraisers, are cutting into homebuilders’ bottom lines.

“We’ve seen a 12 percent increase in material costs but we’ve only been able to pass along about 4 percent to buyers because of our antiquated appraisal system,” said Morgan.

Grant Brown said there is a fear that rising prices for materials could keep some potential buyers out of the new home market.

“We have been doing price increases for the past year but every time you have a price increase you knock somebody out of the market who now can’t qualify for it,” Grant Brown said.

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 72 327 11,765
MORTGAGES 76 371 15,350
FORECLOSURE NOTICES 41 112 3,023
BUILDING PERMITS 382 972 28,226
BANKRUPTCIES 65 345 11,307
BUSINESS LICENSES 19 117 4,155
UTILITY CONNECTIONS 184 700 17,184
MARRIAGE LICENSES 20 100 3,564

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