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Materials Problems Persist in Robust Housing Market
 The worst may be over, but at the peak of the busy spring season home builders continue to be hammered by high or rising construction materials prices and shortages, according to economic analysts at NAHB.
"While wood prices are easing, there is still upward pressure on a number of other materials," said NAHB economist Michael Carliner.
Persistently strong demand for new housing has exacerbated the problem, analysts say, but products such as metals and cement have come under the influence of international factors in the global marketplace.
U.S government policy has been working to the detriment of Canadian lumber and Mexican cement supplies, and environmental regulations have limited the construction of new cement plants and other production facilities.
For the year that ended in February, materials used in construction increased by 9.9%, according to the Bureau of Labor Statistics’ Producer Price Index.
The PPI showed a 37.7% annual increase in the price of steel. Concrete product prices were up 9.4%; lumber, 10.8%; and asphalt, 6.3%.
While still high, wholesale lumber prices averaging $402 per 1,000 board feet in late April were an improvement over the $450 charged a year earlier. (Prices moved down further at the very end of the month, according to Random Lengths.) They were $289 in April of 2003. Lumber prices were at their most recent peak of $470 last August. Each $1 increase per 1,000 board feet adds about $20 to the cost of a new home.
Restrictions on timber sales from public lands are keeping supplies tight. Planned emergency sales of insect-infected timber in British Columbia may put some downward pressure on prices. The futures market indicates an expectation for lumber prices to ease a bit in the coming months.
OSB and Plywood
Prices for oriented strand board (OSB) and plywood are below their peaks of last April, but they remain high. Both are selling for roughly $12 per sheet wholesale, compared to about $6 for OSB and $8 for plywood in the spring of 2003 and more than $16 at their peak. With some 300 sheets needed for a typical new home, the increase over early 2003 is adding nearly $2,000 to construction costs.
In a marketplace anomaly, OSB and plywood prices have been virtually identical since late last year. Plywood, which had sold at a premium over OSB, has been losing market share in residential construction. While OSB is used primarily in home building, housing accounts for only about half of plywood demand; so robust housing production has had a greater impact on OSB. An increase in offshore imports of plywood, mainly from South America, from about 800 million square feet in 2003 to 1.5 billion last year, has also been a factor.
Production of OSB and plywood is expected to continue bumping up against capacity for the foreseeable future. A new OSB plant that opened last year is already operating at its full annual capacity of 600 million square feet. Improvements to existing plants have probably added another 500 million square feet, but North American OSB production has remained at more than 95% of its 26 billion square-foot capacity.
New plants scheduled to open later this year in Florida and British Columbia are projected to add another 1.3 billion square feet. Even so, as long as housing production continues at its current pace, analysts expect to see very little slack in the market.
Pressure on Materials Prices
For at least the short term, the outlook for other essential building materials is not entirely encouraging.
Global demand — especially from China — pushed up prices of scrap metal beginning late in 2003, and that triggered unprecedented increases in prices for finished steel products, as well as copper and aluminum.
Scrap prices have recently eased back somewhat, but product prices remain high, and they are not expected to recede by much, if at all.
As with OSB, high demand has pushed production of wallboard and insulation close to capacity. Price hikes for wallboard have been close to 20% over the past year, and there is little evidence that this will be reversed soon. Previous price spikes have often been followed by price declines, but the next significant downturn is not expected to occur until at least 2006.
Insulation price increases have not been as sharp as those for gypsum products, but cost pressures are not abating, and builders could see some further upward drift. Energy costs are a bigger factor for wallboard and insulation than for most other building products.
Brick and Cement Shortages
Yet to be entirely resolved is the disruption of U.S. cement imports that resulted from rising global demand for the product and a shortage of ships in which to transport it. Overall, about 23% of U.S. cement consumption was filled by imports in 2004, up from 20% in 2003. The average mill value of cement production was $85 per ton in 2004, up from $75 in 2003, according to the U.S. Geological Survey.
The cement problem has been most severe in parts of the country that rely the most on imports, particularly Florida. But shortages have also been encountered in other areas, including Arizona and parts of California. The Portland Cement Association has found cement producers in more than half the states reporting cement on allocation, but builder accounts of shortages have, so far, been less widespread.
Although not yet on the scale of recent cement and steel shortages, an inadequate supply of clay bricks is being reported by builders in parts of the Southeast and Midwest. Brick production is energy-intensive, and rising fuel costs have been contributing to price pressure.
An NAHB survey of builders found a big jump in the number reporting cement shortages from May 2004 to July 2004. Since then, however, those shortages appear to have leveled off.
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