Construction Material Prices Head South, Labor Costs Slow to Follow

For the fifth straight month, the producer price index (PPI) for multifamily finished goods fell in February, dropping 0.6 percent. The slide began last October, reached a low of -2 percent in November, and has continued falling into this year.

Then year-over-year trends are going down as well. In 2004, the multifamily PPI rose 8.9 percent. In 2005, it rose 7.8 percent; and in 2006 and 2007, it rose 4.9 percent and 3.8 percent, respectively. But from February 2008 to February 2009, it only rose 1.1 percent.

"In general, there's been a dramatic change in material costs from last summer," says Kenneth D. Simonson, chief economist for the Associated General Contractors of America, an Arlington, Va.-based trade association. "We had these huge run-ups in the first half of last year in diesel fuel, steel, copper, and asphalt costs. They all did a U-turn."

Contractors in the field are seeing the same thing. "Overall, the materials are generally flat [since last summer]," says Jeff Roblyer, chief marketing officer with Capstone Building Corp., a developer based in Birmingham, Ala. "The suppliers are giving up some margins in the sale. We've gone back on a couple of estimates last summer and reduced them 5 percent across the board."

Labor costs are still going up, but they're moderating. Simonson says construction labor was rising from 4 percent to 4.5 percent last year and is only rising 3 percent to 3.5 percent this year. A big part of that is because there's a large number of construction professionals without work. While construction accounts for about one out of every 20 jobs in the economy, construction-related job losses represent 20 percent of overall job loss.

"We expect labor costs to remain subdued because construction had been on the bleeding edge of job losses in the economy," Simonson says.

Roblyer sees subcontracting companies taking major cuts. "From at least a year ago, we're seeing a reduction in the margins that subs and suppliers are asking for," he says. "We suspect some people are working at no profit to keep their business going."

But those price cuts don't necessarily extend to individual laborers, if they can find work. "The carpenter on the street is not taking a pay cut," he says. "He's either working, or he's laid off. When he comes to work, he's making the same amount of money."

Sliding Down

The Bureau of Labor Statistic's Producer Price Index (PPI) for multifamily housing, which covers construction materials, segments, finished building types, and subcontractors, has been steadily declining for the past year.

Source: U.S. Bureau of Labor Statistics