Homebuilding materials remain 38% costlier than normal

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Prices of construction goods remain 38 percent higher than they were before the pandemic began, a factor that, coupled with rising interest rates, may continue to hamper new home construction.

Even though they’ve come down modestly from their peak in June, the costs of materials used in residential construction declined only 0.1 percent from August to September, and remained 16 percent more expensive than they were at the same time last year, according to the U.S. Bureau of Labor Statistics.

“While prices for certain goods have begun to decline, monthly price changes fail to capture the accumulated growth in prices over the last two and a half years, which has been substantial,” Xander Snyder, First American’s senior commercial real estate economist, said in a statement.

The latest numbers come from the government’s producer price index, and include various types of goods that are used as inputs in residential construction. Lumber, brick, cement and drywall are all part of the picture, among other materials.

Gypsum — an essential component of drywall — remained near its absolute peak price in September, holding mostly steady after reaching an all-time high in August.

Like gypsum, the cost of concrete also continued to climb on a quarterly and annual basis.

Homebuilders and other developers facing this high-cost environment have seen it eat into the profitability of potential projects. And that’s only one part of the difficulties they face, Snyder said.

“Higher construction prices make fewer development projects profitable for both builder and investor,” Snyder said in the statement. “This is exacerbated by increasing interest rates, which further squeeze investors’ potential margins with higher financing costs. This combination is making it more difficult to begin new construction projects.”

These high costs have run up against substantial declines in demand for new homes in recent months. As mortgage rates climbed from around 3 percent at the beginning of the year to 7 percent this month, more buyers have been backing out of the market or even canceling their contracts with builders.

But there are signs that the reduced demand may already be starting to relieve the strain placed on supply chains, which has influenced much of the volatility in prices for construction materials.

Lumber in particular has seen extreme volatility in recent years. This material, often used in the frames of homes, quadrupled in price in just over a year’s time after the start of the pandemic. 

Since then, lumber prices have experienced a roller-coaster of extremes, peaking twice at previously unseen highs before settling back down recently near pre-pandemic levels.

Email Daniel Houston