Cost Of Building Materials Likely To Rise Due To Hurricane Ike
Builders of new homes have been dealing with sluggish sales from lack of buyer demand, and with the potential of nearly $20 billion in damage due to Hurricane Ike – the cost of building materials could easily make a bad situation much worse.
Builders have not seen a reduction in material prices in spite of the slowing of construction over the last two years, due in part to reconstruction of the damage from Hurricanes Katrina and Rita. While some material costs have gone down, most have not – and this latest giant hurricane striking a major population center is undoubtedly going to push material costs up.
In the last year, spikes in the price oil have not only driven up the cost of many materials – it has also driven up the cost of subcontract labor for which builders rely. As energy costs go up – so do the manufacturing and transportation costs associated with the materials builders need.
To make it a trifecta, the number of recently-built home foreclosures is at an all-time high – thus giving new construction some serious competition, as home buyers can find some very nice, nearly new homes for much less than most new construction.
When you bring all of these factors to bear, you can rest assured that new home builders are in for some rough waters ahead. Rising costs will raise their “break-even” point, thus making their efforts less profitable without a retail price increase – which the current market will not bear. Since profitability is already impossible for many builders – more of them are likely to fail.
“It ain’t over ’til it’s over,” Yogi Berra once said. Once again, Yogi is right.
JTB Convent Station NJ says:
I would not want to be a builder at this time. Everything keeps conspiring to hurt them. Thankfully we do not and did not have to much for new construction in our area of New Jersey.
September 14, 2008 — 6:49 pm
Edge - The Credit Crunch says:
JTB, I agree.
Currently here in Arizona, at least in the East Valley, we still have pleeenty of new home construction lots with model homes that were built more than 2-3 years ago. You see the bulldozed lots, the sales office, and that’s about it. No work trucks, no bulldozers or tractors, nothing.
With the hurricanes affecting the price of gas and oil right now, in addition to the pricing crashes in new construction, plus construction materials themselves costing more, it’s like someone’s playing a cruel joke there.
The land is already bought and I’m not sure how much further builders and reduce the costs of labor and materials, or how much they’re willing to at least. These guys are either going to have to take a big hit on their current open portfolio, or go out of business. Unfortunately for the little guys, I don’t think their margins are as big as the big fish out there.
September 15, 2008 — 11:44 am
Sam in Austin says:
We saw it after Katrina and wi’ll see it after Ike. In many markets, like Austin, builders are not likely to put up many specs after they unload current inventory. Prices were going to go up for new construction just because of this and now Ike will push up cost for new construction more. What that should mean is an increase in demand for resale as that inventory will be less expensive. More demand should push resale prices up.
September 15, 2008 — 2:59 pm
Chris says:
Thanks to this bad market my uncle just got a super deal on a ton of wood, for a lumber yard that went under. Enough to save quite a bit on the next couple of houses.
Around here stuff is still selling, just not as fast and for not as much.
September 16, 2008 — 3:57 pm
Gwinnett County Ga New Home Communities says:
I have pondered this angle too. Home builders are indeed facing higher costs for materials while trying to compete against resale homes by individual sellers and banks.
Home builders are in a similar situation to automakers in Detroit; they face steep competition with rising production costs.
October 16, 2008 — 3:19 pm