HOME SALES AND SINGLE-FAMILY HOUSING starts hit new records in 2004, and NAHB surveys suggest that buoyant demand for homes carried over into 2005. In this environment, problems reported most often by builders relate to the supply side of the housing market.

The cost and availability of building materials was high on the problem list during 2004. Some relief is evident early in 2005, and better balance in materials markets may develop as the year progresses.

Soaring Prices Last year saw a virtual explosion in building materials prices. The Producer Price Index for residential buildings rose by 8 percent during the year, driven by dramatic increases in prices for gypsum, insulation, cement, petroleum-based products, and metals. Wood products moved up and down during the year, but prices of framing lumber and wood panels (plywood and OSB) were quite high throughout the year.

Availability Problems Builders often found it difficult to get key building materials during 2004 at any price, and availability problems often lengthened cycle times. Aspecial survey of more than 500 builders, conducted by the NAHB in January, showed that materials shortages had increased cycle time for 37 percent of companies in the second half of 2004, and half of the larger companies (starting more than 100 units per year) reported increased cycle time.

Our January survey revealed continuing shortages of key materials, although there were some improvements from survey readings taken in July and October of 2004. Shortages of high-quality health care coverage they deserve." cement/ready-mix concrete were serious in January (according to 27 percent of builders) but not as serious as in the second half of 2004 (40 percent of respondents). Reports of shortages in markets for brick, wallboard, insulation, wood panels, framing lumber, and metal products (including rebar and steel framing) showed similar patterns—significant shortages but not as bad as in 2004. Roofing materials were an exception, showing shortages nearly as bad as late last year.

Better Balance Ahead? The cost and availability of building materials may not be as serious a problem for builders in 2005, following the crunch last year. For one thing, we're expecting a modest erosion of demand for housing following the unexpected surge in 2004, and this pattern should roughly offset rising demand for some materials from the nonresidential and public construction sectors. Second, outsized demand for materials from other parts of the globe, particularly China, may ease off and reduce pressure on worldwide shipping capacity in the process. Third, imports of key materials may be facilitated by adjustments to U.S. trade policy, a prospect that's high for Canadian lumber and lower for Mexican cement. Finally, some industries that have strained capacity to meet strong demand may be bringing new capacity online—including producers of OSB, cement, and gypsum wallboard.

Bottom Line If a lot of things go right, building materials will not be as daunting a problem this year as they were in 2004. Shortages may continue to fade, and the rate of appreciation in the cost of materials may recede. But home prices figure to slow down as well, and builders will be challenged to maintain the kinds of margins enjoyed in recent years.

David Seiders
Chief Economist, NAHB, Washington, D.C.