June 19, 2008

Higher Energy Prices Threatening Home Builders

By Alan J. Heavens, The Philadelphia Inquirer

Jun. 19--Higher energy prices soon may claim another victim: Home builders' bottom lines.

The developers' costs are escalating not only because the prices of raw materials are soaring, but also because the energy needed to manufacture and transport the goods is rising. It comes as home sales and prices continue to slump.

"Still-robust global demand and speculation in some commodity markets is driving up the cost of building a home at the same time house prices are falling," said Mark Zandi, chief economist at Moody's Economy.com in West Chester.

"Nothing is going right for builders," Zandi said.

Actually, there is some relief -- at least for now: Declines in lumber and drywall prices, coupled with a construction labor surplus, have helped mitigate the effects of rising costs, builders and economists say.

Oil is contributing mightily to higher costs for materials because it is an ingredient in asphalt for roads in developments and for roof shingles, plastic used in siding and other products, vinyl flooring, windows, and paint and other coatings. Higher oil prices also mean higher transportation costs to get these products from factory to job site.

For example, some builders are reporting that paint prices have nearly doubled in the last year -- including increased costs of oil-based additives and energy surcharges. Rohm & Haas Co., the Philadelphia chemical company, now indexes the prices it charges for paint additives and other products to its cost for raw materials.

Builders' cost increases are affecting residential and commercial construction equally.

"Construction materials and commodity costs continue to rise, with some experiencing double-digit price escalation since the first quarter of 2008," said Karl F. Almstead of Turner Construction Co., of New York, which builds primarily commercial properties.

Five years ago, copper used in wiring and plumbing was about 60 cents a pound. Today, as the result of continued heavy demand from China and other emerging countries, the price is $3.60 a pound, or $7,200 a ton.

China's demand for steel also is unabated, despite predictions that consumption would decline this year.

While demand for cement in the United States has fallen during the last year, more of what is being produced is being sent abroad, especially to China for its booming commercial construction market, said Bernard Markstein, chief economist at the National Association of Home Builders in Washington.

"The [cement] price is rising steadily because it is energy intensive -- especially the cost of moving it," he said.

Large home builders try to control material costs by signing long-term contracts with suppliers. But smaller builders, such as Vaughan & Sautter on the Main Line, do not have that kind of clout.

"We are at the mercy of the marketplace," said co-owner Chip Vaughan.

South Jersey builder Bruce Paparone agrees.

"Most suppliers are charging fuel surcharges across the board," Paparone said.

The products experiencing the biggest price increases are asphalt paving -- "our bids are up 50 percent to 60 percent and more," Paparone said -- and cast-iron used for water mains.

"We are just seeing the start of increases," he said.

Still, lumber and drywall prices are down, Vaughan said, helping to offset some of the increase for copper and asphalt products.

According to Random Lengths, the Eugene, Ore., firm that follows the lumber market, the price of framing lumber used in single-family houses is down 11.5 percent from June 2007, a result of slowed home construction.

Drywall and other gypsum products are down 14.4 percent year over year, Markstein said, as demand has cooled.

"In addition, drywall manufacture consumes a lot of natural gas, which is not rising as fast as oil," he said.

The price of structural panels used to sheath walls and roofs is about level with a year ago.

Labor costs are down significantly because housing starts are down, Markstein said.

"Labor is more than 50 percent of the cost, and there is not much work. We have been asking our subcontractors to hold their prices, which they have pretty much done," Vaughan said.

With sales down, and competition for buyers intense, it is highly unlikely builders will be able to pass increased costs on to buyers.

That was the case in the mid-1990s, during the last, and what some builders call more severe, downturn.

Since first-time buyers were instrumental in getting sales moving then, builders are again dealing with higher material costs by building smaller houses "with laminate countertops rather than granite," to attract them, Markstein said.

Contact real estate writer Alan J. Heavens at 215-854-2472 or [email protected]


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