Wednesday, April 24, 2013

NAHB: Surviving the Squeeze of Rising Materials Costs

As escalating costs of key residential construction materials squeeze builder profit margins and in some instances prevent them from meeting the demand for new homes, NAHB is working on a number of fronts to highlight this issue to policymakers and find ways to increase production of selected building components to ease rising price pressures.

In response to the prolonged housing downturn, many building materials companies cut back on production and capacity. Prices for some items also declined. Over the past year as residential construction showed signs of a sustained recovery, certain materials prices began to move up.

For example, prices of oriented strand board (OSB), an engineered wood product, have doubled since April 2012 and framing lumber prices have gone up by 40% over the past six months. However, the overall increase in the cost of residential construction materials has been more moderate.

Materials Production is Lagging Demand

Producers of wood products and gypsum have pointed to productive capacity that was idled or eliminated during the housing downturn, resulting in higher production costs and higher prices. Lumber and OSB producers have indicated that returning or replacing that capacity to production has been conditional on confidence that the current recovery in housing would continue.

But returning that capacity to production is not as simple as flipping a switch: Labor, materials and distribution channels for both inputs and outputs need to be re-established. OSB producers have identified rebuilding supplies of raw materials (wood, waxes, resins, etc.), recruiting and retraining a labor force, as well as transportation networks (trucks and drivers) as impediments that are inhibiting a faster return of idled capacity.

The current high prices are already bringing productive capacity back online, but supply is expected to lag demand into 2014.

Expect High Prices for Lumber and OSB in Near Term

The outlook for lumber is for continuing high prices. The two driving factors will be strong global demand and limited supply. The U.S. housing market recovery plus strong demand from China and Asia will keep upward pressure on prices.

Meanwhile, the supply of available logs will be constrained by two important developments. First, the logs made available due to the mountain pine beetle infestation are reaching the end of their useful life. The harvest peaked in 2004-05, and the logs have a usable life of 8 to 10 years, so this supply is becoming unusable. Increased dust from these older, more brittle logs has been blamed for recent mill fires in Canada, and the beetle epidemic will result in a permanent reduction in lumber production in British Columbia.

The second development is ongoing forestry management regulations in eastern Canada where Quebec has reduced timber harvesting by 30% in the last 10 years.

The outlook for OSB is similar to lumber: idled capacity and expectations for continued high prices in the near term. But with some companies bringing production back online, prices could come down in the second half of the year and in 2014.

However, competing factors are at play. Strong housing demand is keeping prices elevated while a wave of new capacity in the coming months is expected to put downward pressure on prices. Buyers are taking a cautious approach, fearing overbuying just before the decline.

Gypsum producers have also pointed to productive capacity that was idled or eliminated during the housing downturn, resulting in higher production costs and higher prices. Figures from the Gypsum Association show that U.S. shipments of gypsum board rose from 23 billion square feet (bsf) in 1995 to a peak of 36 bsf in 2005 before dropping to a low of 17 bsf in 2010. Shipments rose to 19 bsf by 2012.

The long drought in housing not only took its toll on home builders, but also on the network of suppliers and contractors that builders rely on. It will also take time to rebuild that infrastructure.

NAHB Actions

To ensure a sufficient supply of building materials and expedite the housing sector's return to operating at full capacity, NAHB is acting along several fronts.

  • Testifying before Congress. Legislation requiring the government to implement active forest management plans would benefit rural communities and boost timber harvesting on federal lands, NAHB member Justin Wood told Congress earlier this month. Testifying on behalf of the nation's home builders before the House Natural Resources Subcommittee on Public Lands and Environmental Regulation on April 11, Wood, vice president of construction for Fish Construction NW Inc. in Portland, Ore., registered NAHB's support for the "Restoring Healthy Forests for Healthy Communities Act" (H.R. 1526). The legislation was introduced by House Resources Committee Chairman Doc Hastings (R-Wash.) and would also encourage increased production on federal timber lands, Wood said.
  • The Washington Examiner reported on the congressional hearing and cited Wood's testimony in support of the forest bill. "This legislation will go a long way toward helping rebuild the supply chain and reviving local mills and timber companies, while ensuring the continued recovery of the housing industry," Wood said.
  • Meanwhile, NAHB lobbyists continue to press the issue with lawmakers, and builder members are also meeting with their members of Congress. Montana builder Eugene Graf recently broached the topic with Senate Finance Committee Chairman Max Baucus, who has been a housing supporter, during an economic roundtable with local business leaders hosted by the senator earlier this month in Bozeman, Mont. Graf told the senator that regulations and building product costs are making it more difficult to provide affordable housing.
  • In a related area, NAHB on April 16 sent letters to members of the Senate Energy and Natural Resources Committee and the House Natural Resources Committee in support of the Lyon County Economic Development and Conservation Act. The bill would increase the production of copper, which can add up to 4.4% to the cost of building a new home. "As the housing recovery gains momentum, builders are seeing price increases and shortages in many building supplies, including copper," the letter stated. "By allowing for increased domestic development of copper, this legislation will provide American home builders and consumers with more affordable building material options."

  • Interacting with policymakers and producers. In recent months, NAHB has met with Canadian government and U.S. Commerce Department officials on the need to ensure an adequate supply of lumber and other building materials and sent letters to Acting U.S. Commerce Secretary Rebecca Blank and former Interior Secretary Ken Salazar (who resigned recently) urging the Cabinet officials to ensure "there are no regulatory barriers or supply-chain interruptions that would increase prices or impede availability" of building materials in the market.
  • Getting the message out to the media. Through print, broadcast, social media and the blogosphere, NAHB continues to hammer home the message that higher costs for building materials are hurting consumers and builders and impeding the recovery. "Rising costs put squeeze on builder confidence in April," read the headline from the latestNAHB/Wells Fargo Housing Market Index released on April 15. "Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values," said NAHB Chairman Rick Judson. "While sales conditions are generally improving, these challenges are holding back new building and job creation." 
  • USA Today, The Washington Post, Bloomberg, The Hill, CNBC, the Chicago Tribune, Forbes and U.S. News & World Report were among the major media outlets to report on the HMI data and quote Judson and/or Chief Economist David Crowe. The CNBC headline read: "Home Builder Confidence Hammered by Rising Costs," while the lead sentence in anAssociated Press story that ran in hundreds of outlets throughout the nation stated: "U.S. home builders are concerned that limited land and rising costs for building materials and labor will slow sales in the short term."

  • Providing price escalation language. To help members limit the damage of unpredictable price hikes for building materials, NAHB is providing price escalation language that can be included in home sales contracts. For more information about NAHB's escalation clause and to download it, click here. Or email David Crump at NAHB or call him at 800-368-5242 x8491.
NAHB also encourages its members to establish good working relationships with their vendors so that during periods of price volatility, builders can work out arrangements with their suppliers to pre-pay at current (presumably lower) rates and let them handle the storage and delivery of materials for when they are needed.

It will take some time for supply chains to re-establish themselves following the recession. NAHB continues to monitor conditions in building materials markets and to work with government leaders and producers to encourage suppliers to move product to the market quickly. As the industry recovers, this will help to maintain a healthy housing market.

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