Every dark cloud has a silver lining. That's right—even the for-sale housing slowdown has a bright side for both single-family and multifamily developers: Building materials tied directly to residential construction have dropped considerably in price in the wake of the housing slump.
Lumber, gypsum, and insulation are the three big categories to watch. In December 2007, lumber was down 3.8 percent from the previous December, according to the Producer Price Index from the U.S. Bureau of Labor Statistics. In the same period, gypsum products fell by a dramatic 22.2 percent; insulation materials were down 3.3 percent.
The drop in lumber costs appears to be generating the most industry buzz. “Lumber is about 35 percent off its peak of two years ago,” says Michael Schlegel, president of Greenbelt, Md.-based Bozzuto Construction Co. “Panels—plywood and OSB—are about half the cost of what they were two years ago. It's a pretty dramatic change.” But Schlegel is grateful both for the lower costs and for the ability to forecast prices when the firm underwrites deals. “The best effect the pricing drop has had on us is our ability to predict what things will cost six months to 12 months from now,” he says. “A year-and-a-half to two years ago, costs were literally going up 1.5 percent a month.”
Overall, building material costs for multifamily new construction rose last year, but at a significantly reduced level than in the prior two years. Construction costs rose 3.2 percent from 2006 to 2007, according to the Producer Price Index, which measures all of the building materials used in multifamily construction. This is well below the 7.1 percent increase from 2005 to 2006 and the 7.6 increase from 2004 to 2005.
So what's accounting for the increase in construction costs? While residential-centric products such as lumber and gypsum are down, certain materials not tied strictly to homebuilding have remained flat or are increasing—namely cement, steel, copper, and petroleum-based materials such as asphalt shingles and PVC. While costs have slowed of late, the price tags are still generally rising in large part due to higher energy costs and global demand.
“The products are used not just in construction but other industrial products,” says Bernard Markstein, staff vice president of forecasting and analysis for NAHB economics. “Steel is used in cars and washing machines, for example, and copper is used in industrial processes. And with the dollar down, that has pushed up import costs further which was a relief valve in the past where we could import some of these products.”
In the case of cement, freight rates to import the product from China cost three times the amount of the actual cement, adds Ed Sullivan, chief economist at the Skokie, Ill.-based Portland Cement Association, which represents cement companies in the United States and Canada. “As a result, you are seeing imports recede dramatically,” Sullivan says. “So, while on the surface it seems like this is a market where demand is ebbing and domestic supply is increasing, you'd think, ‘Well, gee, that is a great outlook.' That import [factor] changes everything. As the market continues to contract, you are going to get significant cutbacks in imports again.”
The outlook for 2008 remains fairly positive with moderate price increases predicted for cement, steel, and copper due to pressure from global development, while gypsum, lumber, and insulation costs are expected to accelerate slightly as they've reached their lowest peak, Markstein says. Of course, there is a whop-ping wild card—anything can change if the U.S. goes into a full-fledged recession. “We'd rather have slightly higher prices and no recession,” says Mark-stein. “But if there is any bright side to a recession, it would be that we would get lower commodity prices out of it.”