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July 05, 2013

Recovery of housing industry sends cost of materials soaring

The power went out for much of the nation's home-building machinery during the recession, forcing sawmills to stop turning logs to lumber, slowing operations that mine gypsum used in drywall and cutting production of oriented strand board.

Now that the housing market is seeing increased demand from newly confident buyers, prices have shot up for some key construction materials and builders are passing those costs onto consumers -- both buyers of new homes and those remodeling kitchens and bathrooms.

"Materials have a big impact on new construction home prices," said Jeff Burd, president of Tall Timber Group, a Ross-based research company that tracks new construction. "Half the cost of a new house is materials. If the cost of materials goes up, the price of the house goes up.

"During the recession, if the cost of materials went up, builders could not pass the cost on to the home buyers. But now more people are trying to buy houses. The demand for new homes is growing faster than the supply to meet it and those rising costs for materials are being passed on."

While the local and national housing market is nowhere near back to pre-recession levels, residential builders are beginning to see a steady improvement. But many of the manufacturers that supply building materials have been operating at depressed levels and find themselves scrambling to meet the demands of the budding housing recovery.

The lag time in restarting closed plants and hiring workers to staff them is partly to blame for sending the prices of building materials soaring.

"The price increases have been massive," said Jim Wyse, owner of Wyse Builders in Ross. "It has driven a lot of people out of the market for new homes and remodels. I've been in the business 25 years and today the cost of building a total home from start to finish has tripled.

"Obviously, labor costs are in there. But labor has not gone up nearly as much as materials. The additional regulations they put on us has added to the costs as well. It's not that builders are making more money, they have to raise prices to cover the cost of building a home."

Mr. Wyse said state regulators tried to implement rules requiring builders to install sprinkler systems in all new homes, which would have added at least $10,000 to the purchase price. But state and national builder associations have managed to get those rules put on hold for now.

The increased cost of building materials may be reflected in data on home sales in the Pittsburgh metropolitan region. The median price of a new home in the area covered by Allegheny, Beaver, Butler, Washington and Westmoreland counties increased 14.5 percent in May to $312,765, from $273,150 in May 2012, according to RealSTATs, a South Side-based real estate information service.

Even the repairs and remodeling business is getting squeezed.
"A gallon of paint that used to cost $15 two years ago is now $25 a gallon," said Chuck Pupich, owner of One Source Repair in Millvale. "Roof shingles were $25 a bundle, now they are $35 a bundle. A hot water tank I used to pay $125 for now costs between $375 and $400."

That hits the owners of older homes, too. "Most people are remodeling their homes, not building new ones," he said, and "the little guy doesn't get the bulk discounts like builders do."
Nationwide, the volume of sales for new homes is up 30 percent for the first five months of this year compared to the same period a year ago, according to the National Association of Realtors in Washington, D.C.

"What we saw in 2012 is that while demand is coming back for new houses, the infrastructure to supply the demand was still at the most depressed levels," said Robert Denk, a senior economist at the National Association of Home Builders in Washington, D.C.

"People want to blame rising materials prices on Hurricane Sandy and other natural disasters," he said. "But they are a small part of a bigger reality. The natural disasters are less important a factor than the overall boom-and-bust housing cycles."

Those cycles can be seen even in short-term swings.

When housing starts hit a peak of 1 million in April this year, the price of oriented strand board rebounded 150 percent from the lows seen in 2008 and 2009. Lumber prices were up 67 percent and gypsum drywall rose 50 percent, according to the National Association of Home Builders.

Prices for lumber and plywood have come down a bit since then, due to housing starts falling back to around 900,000 in the month of May.

So, while prices for building materials spiked in April, they have fallen overall since January. Lumber prices are down 17 percent as compared to the beginning of the year and strand-board plywood has dropped 20 percent, according to Random Lengths, an Oregon-based trade publication for the lumber and plywood industry.

Lumber prices peaked in April at $451 per thousand board feet, but have fallen to $322 per thousand board feet. Structural panel strand-board peaked in April at $519 per thousand square feet, but now sells for $380 per thousand square feet.

Chuck Balsano, director of commodity purchasing for professional building supply company 84 Lumber based in Washington County, said lumber prices have fallen because the industry had hoped for 1.2 million housing starts in May, but saw only 900,000.

"In the eyes of what the building industry was hoping for, the falling housing start numbers were a disappointment," Mr. Balsano said. "People took on too much inventory hoping housing starts would trend toward 1.2 million when in fact the numbers took a step back from April."

He predicts a rebound is coming, one that suppliers will welcome -- even if consumers don't.

"We think better times are ahead in the next three to six months," Mr. Balsano said. "Housing starts will trend upward, and the lumber mills will be able to raise prices."



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