New-Home Construction Plummets, Construction Materials Prices Soar

New-Home Construction Plummets, Construction Materials Prices Soar
March 16, 2011

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

New-home construction has fallen to nearly the lowest level ever recorded, according to the U.S. Commerce Department.

Home construction starts in February fell to a seasonally adjusted annual rate of 479,000, down 22.5 percent from January and the second-lowest on records dating back more than 50 years, the Commerce Department reported in March. Government economists say more than 1.2 million units a year have to be built for the housing market to be considered healthy.

Equally disconcerting, according to the National Association of Home Builders, total permit issuance for new homes fell 8.2 percent to a record low pace of 517,000 units in February.

Meanwhile, prices for many construction materials have spiked higher.

‘Great Deal of Nervousness’
“The decline in new construction and permits in February is the culmination of a great deal of nervousness that both builders and consumers are feeling right now," said Bob Nielsen, chairman of the NAHB and a home builder from Reno, Nevada. "In an already-fragile market where credit for building and buying homes remains extremely tight, additional concerns about energy costs, interest rates, and other factors are contributing to an atmosphere in which many have adopted a very cautious stance."

The drop in home construction activity occurred in regions across the country. It fell 48.6 percent in the Midwest, 37.5 percent in the Northeast, 28 percent in the West, and 6.3 percent in the South.

Analysts blame a variety of factors including millions of foreclosed homes causing a glut of houses for sale, falling housing values that make people reluctant to build new houses that could stagnate or decline in value, and continued high levels of unemployment.

‘Too Many Uncertainties’
"While our latest member surveys showed a slight uptick in expectations for the future, there are just too many uncertainties out there for most builders and buyers to comfortably move forward with a new-home project at this time," said NAHB Chief Economist David Crowe. "We need to see several months of consistent improvement in economic factors, plus concrete signs that the flow of credit to housing is improving, in order for the industry to return to a steady recovery and facilitate job growth."

Recent news on price inflation could add to the uncertainties in the housing and commercial real estate construction industries. Consumers are seeing sharply higher prices for essentials such as food and energy. The Labor Department on Wednesday reported food prices soared 3.9 percent last month, the biggest monthly increase since 1974.

Many building materials costs are also climbing.

‘Staggering Price Increases’
“With construction spending hovering near a 10-year low, contractors are holding bids steady even while being hit with staggering price increases for key inputs,” said Ken Simonson, chief economist for the Associated General Contractors of America. “That combination threatens to add to an already appalling toll of laid-off workers and shuttered construction firms.”

Prices for materials used in construction leaped 1.1 percent in February and 6.1 percent during the past 12 months, Simonson said. Construction costs also outran the producer price index for finished goods, which rose 5.6 percent since February 2010, he added.

Simonson said price increases were particularly steep for four essential construction inputs. Diesel fuel prices climbed 7.1 percent in February and 40 percent during the past year; prices for copper and brass mill shapes increased 4.5 percent for the month and 20 percent for the year; steel mill product prices rose 4.7 percent and 13 percent, respectively; and prices for insulation materials rose 3.5 percent in February and 6.0 percent for the year.

Despite these rising prices, contractors have kept bids down because of the intense competition for work. The producer price indexes for new office, industrial, and warehouse construction rose less than one percent over 12 months, and the index for new schools was up just 1.4 percent, Simonson said.

Overseas Demand, Shortage Fears
Simonson attributes much of the price pressure on copper, petroleum products, steel, and other items to strong demand in some overseas markets “as well as fears of supply shortages.”

Prices of domestically made construction materials that are sold only in the United States—such as concrete, brick, clay tile, and drywall—have actually declined slightly over the past year, he said.

“Seldom has there been so clear a difference in prices between purely domestic-only items and things for which there is global demand and trade,” he said.

Another Uncertainty: Japan Earthquake
A further uncertainty for the construction industry is the string of disasters that have hit Japan, starting with a powerful earthquake in March that caused a massive tsunami that severely damaged several nuclear power reactors, destroyed tens of thousands of homes and businesses, left millions of people without electrical power, and killed an unknown number of victims.

“I don’t think Japan will suck a lot of building materials out of the U.S. market,” Simonson said. “It won’t cause a boom in demand for cement, for instance, but it could go either way for oil and natural gas. If Japan starts importing more oil and gas to make up for what it loses because of the nuclear plants, prices could go higher.

“But the Japanese economy will be hurt, so demand for transportation and industrial fuels will be down. That’s why, right now, there’s no way to say which way prices might go.”

Steve Stanek (stanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate Policy News.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)