We have had robust reflation/inflation ever since the Fed took rates down to half century lows, and then left them there for quite a while. Each time I mention this, some dang fool insists its just energy, depsite the evidence that food, commodities, precious metals, heath care insurance, industrial metals, medical care, housing costs, education, etc. are all higher in price than they were.
Today, we add yet another category of goods that hve been going up in price: construction materials.
Ken Simonson, chief economist for The Associated General Contractors of America, issued an analysis this week that compared construction costs over a four-year period from 2001 to 2005 . . .
By September of 2004, steel and copper construction products had soared as much as 62 percent higher than a year earlier.
Overall, construction material cost climbed about 11 percent in the 12 months ended this past September.
What’s on the construction list price increases?
Gypsum products were up 21 percent;
asphalt had climbed 12 percent;
insulation materials rose 11 percent;
lumber up 12 percent;
steel and copper construction products up 62 percent;
PVC plastic up "almost" 100%;
gypsum — double-digit increase;
concrete prices: plus seven percent from 9/03 – 9/04; more than 12% 9/04 – 9/05;
Diesel fuel up more than 50 percent;
Cement: rising prices and spot shortages;
The diesel expenses "hit contractors hard. Not only did they have to pay more to run their own trucks, bulldozers, backhoes, and generators, they also had to pay more for fuel-thirsty materials such as concrete, which burns considerable energy while being mixed and transported in heavy loads to sites."
The only bright spots: Lumber, which thanks to hurricane-downed trees is abundant (and relatively cheap) — and labor, whose costs have risen less than 3%
Source:
Construction costs building steam
Contractors’ group says prices for concrete and other materials have soared the past two years.
Les Christie
October 27, 2005: 2:03 PM EDT, CNN/Money staff writer
http://money.cnn.com/2005/10/27/news/construction_costs_soar/index.htm
two points: (1) Housing Bubble and (2) Inflation
(1) Bubble: …some have said, me included, that the run-up in construction costs (thx to the sister storms and the housing boom) will be the primary factor that will ‘break the back’ of the housing bull run…
and if you dont believe the surge in construction costs will do it alone, consider the perfect storm of: development cost increases + interest rate increases + slowing economy = deflating housing bubble.
(2) Inflation: Barrys right – we will see inflation pick up in 2006 beyond what is in ‘core’ today. And beyond? IMHO, pending energy price changes, inflation should slow to a crawl in 2007 via to housing deflation, rate hikes, bear market and economic slowdown.
Over two years ago I had a long discussion with a building contractor in Florida. The rising price of steel was
killing them because they had not included that in their innitial bid.
But they were caught in a bind. Competition was such that if they made a realistic estimate of steel cost in their bid they would not get the job. But if their bid was to win the contract they had to bid so low that they would lose money. Rising costs are not necessarily inflation. If they find it easy to pass rising costs through it can become generally rising prices, or inflation. But if they can not pass it through it is not inflation.
As of yet there is little evidence that we are seeing widespread passing of higher costs through to final prices, largely because strong productivity allows them to remain profitable and absorb the higher costs. That is not to say that it can not happen in the future, but it is not happening yet.
CPI is a useless indicator so let’s look at household expenses (’06/’05) another way:
1. Interest 1% higher on 150,000$ variable rate mortgage = $1,500 more per year
2. Muni taxes: let’s say $500 more per year
3. Heating bill: let’s say $500 more per year
4. 2 cars, gasoline 50% more: $1,000 more per year
5. Credit card, 2% floor boosted to 4%. Average household debt on cards = $10,000: $2,000 more to pay down per year
For a grand total of: $5,500 on average household income of 60K. = 9% increase in cash outlay!!! And that doesn’t include health care, food, insurance, home quity loans, etc. If households were to consolidate their credit card debt then we would only have $3,500 or 5.8%
If no inflation is being passed on that would mean margins are getting squeezed somewhere down the line but margins and profits have never been so high!
I’ve been trying to make sense of this and up to now the only thing I can come up with is that companies are still playing accounting games and/or they haven’t been investing so don’t have to depreciate as much as in they were just a few years ago.
and they’ve gone from long term financing to short term financing.
D – you are 100% right. Inflation will pick up if wages rise on the corporate side and pricing increases for end products. What we are “hearing” is that there is little increase overall in pricing (though PPI is up) – it does mean there will be a SQUEEZE in earnings if increases arent priced along. I think there is a lag effect going on — and 4Q earnings will get the pinch. I think 1Q will be a mixed bag – more inflation from those who do pass along price increases and some dissapointing earnigns from companies/sectors with little pricing power. Some are saying pricing power is THE leading indicator of a company’s near term earnings growth…
http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=14313003&SearchID=102627558&SearchResultID=102627558&ResultCount=5&PageNumber=1&FromLocation=mylistingfs&ItemIndex=3&PageSize=20&PgCxtGuid=49b2b8c0-12df-44df-bf8d-ba74e72c739a&PgCxtFLKey=&PgCxtCurFLKey=MyListingsFS&PgCxtDir=Down
CHECK OUT MY OFFICE CONDO LISTING TO BE BUILT. (copy & paste link)
We expect material prices to increase by 20-30% before we start construction. Keep in mind that most banks require 40% pre-sold before approving a loan. How do you do that? By selling at the current price, not future price. A builder might want to build-in a price increase to the current buyers or simply make sure that the 60% balance is priced to blend with th efirst 40% to guarantee the needed margin…..
If anyone actually bothered to read the press release, they would have seen that the increase in construction costs actually peaked in 2004, and are way down off of thier peaks so far in 2005. For example, the construction materials component of the PPI was up just under 4% in September 05 compared to over 10% in September 04. Basically the only area still experiencing signifigant inflation is asphalt, concrete. Steel is down, lumber is down, insulation is down. In other words, the rate of increase has peaked and is headed downwards. And this study was concluded before the back up in energy prices became apparent, which should dull cost pressures in ashpalt and diesel.
I agree that these statistics aren’t great and understate inflation (OER anyone?) but I think panicking about inflatoin over information that is over a year old is not the best use of time.
Dear Sirs…how is the picture today July 29, 2006 in the construction business for the different branches?…I know lumber is down and going down more…how are the other branches?…please give me a response asap…I am building a new home very soon in August 2006…shall I wait a while or build now directly?…please advise…yours Leif Werner
GSL Investments, Inc. is raising the roof around Houston. At the present time it is adding 1 million cubic feet of volume to a structure at 5800 Clinton Drive. The company, founded by Gustave S. Levey in 1982, is transforming seemingly obsolete low-clearance industrial buildings into marketable, high-cube facilities. GSL, formerly a build-to-suit industrial contractor, began to focus on existing industrial property renovation after the sale of its Build to Suit business to the Welcome Wilson, Sr. family in 1998. (GSL Welcome Group, LLC) So far, GSL Investments has “raised-the-roof” on four projects since developing this technology in 2005.
The Clinton Drive property is a 133,310 square foot former Ford parts distribution warehouse. The building’s 13’ maximum clearance has been increased to 29’ at the roof’s peak. The development was done on a speculative basis – GSL Investments is currently in negotiations with prospective tenants.
In addition, GSL Investments has begun raising the roof at 2200 Lauder Road, a 100,000 square foot warehouse formerly used as a door manufacturing facility. It is now going to have a maximum clearance of 31’ with a 21’ hook height in the two crane-ready center bays.
The largest roof raising project completed to date is the former National Oilwell Varco manufacturing facility located at 12800 Aldine Westfield Road. GSL Investments acquired the 150,000 square foot building with a total of 28 acres of land. It subdivided the large tract and sold several smaller tracts for retail development. After raising the roof, GSL Investments leased the new high clearance facility, complete with all bays converted to crane-ready status to Ivy Steel and Wire.
Levey has worked on several inventions throughout his career in the paint spray industry. He built a number of buildings needed for his paint spray equipment business, SpeeFlo, Inc. and from there he became aware of the need for a Build-to-Suite Industrial Construction Company. Levey graduated from University of Houston College of Law in 1970.
Project manager for the current development projects is David R. Ebro, Levey’s grandson. He worked as property manager for GSL Industrial Management, L.P. before becoming vice president of GSL Investments, Inc.
Ebro attended Florida International University, where he received his Master’s degree in Economics. “Occupants are now concerned with a buildings volume, not just surface area,” Ebro said. “Rather than tear’em down – we lift’em up.”
For additional information contact:
David Ebro at 713-772-1393