Builders’ inability to raise home prices puts them in a bind at a time when inflation keeps nipping at their gross margins. Over the past year or so, builders have been particularly hard-hit by rising prices in several categories of construction products, and some have been turning to distributors for relief as their other sources of supply—manufacturers and even contractors—dig in their heels and jack up commodities prices and delivery charges to defray their own escalating operational and production costs. As home prices plummet, the costs of certain construction materials have increased steadily. The Bureau of Labor Statistics’ Producer Price Index (PPI) in July for “input to construction” was up 11.9 percent over the same month in 2007 and up 44.1 percent since December 2003. Steeper spikes were found in indices for asphalt shingles (which are on allocation in many parts of the country), ready-mix concrete, brick and block, and plastic resins and materials.
Anecdotally, builders say inflation is worse. Arlan Barling, purchasing manager for ICI Homes in Daytona Beach, Fla., told Builder in mid-August that shingle prices in his markets were up 57 percent this year. A clubhouse ICI was building incurred four increases for carpeting within 45 days. Rebar had jumped 100 percent since January, “and with the news that it’s going to cost $147 billion to repair the earthquake damage in China, there’s no reason to believe rebar prices will be going down,” he says.
China’s voracious appetite for construction materials is just one factor impacting commodities prices. Jim Baker, a spokesman for the Asphalt Roofing Manufacturers Association, said the damage wrought by hurricanes pummeling the Gulf Coast made it impossible to calculate future supply, demand, and pricing. “We are facing unprecedented inflation” in raw materials, transportation, and energy, adds Greg Salah, senior vice president of sales and marketing for USG Corp., whose products are among the few construction materials that were deflating until recently. In the second quarter of 2008, USG’s average selling price per 1,000 square feet of wallboard was down 23 percent. Barling says a ½-inch wallboard sheet that sold for $17 in early 2006 could be bought in August for $6.24.
USG this summer announced three price increases of 10 percent to 12 percent each. Salah sees further hikes as inevitable because “there’s nothing today that tells us inflation is going to decline in the foreseeable future.” Suppliers of glass, vinyl siding, ready-mix concrete, and roofing have all announced multiple price increases. What’s changed from the past is that suppliers aren’t backing down when customers balk. Barling of ICI says that around May, suppliers told his company and other builders, ‘If you don’t like it, don’t buy it.’ They didn’t want to hear about lower construction.”
Still, he’s sympathetic to his suppliers’ plight. “They’ve reached a point where they can’t [absorb costs] anymore.” Not every builder buys that line. Phil Menard, director of purchasing for William Lyon Homes’ San Diego/Inland Empire division, says suppliers passing on price hikes for raw materials and fuel today is no different from what happened in the 1990s. Joe Murphy, Pulte Homes’ national commodities director, is ambivalent about suppliers’ predicaments when “consumers aren’t willing to pay more for a house. We’re getting it from both sides.” Pulte is getting some help from distributors. “Two years ago, we didn’t have a direct purchasing agreement with any distributor; now we have 15 to 17 for roofing alone,” through which Pulte gets better pricing by guaranteeing regional purchases. But distributors, whacked by housing’s woes, have been closing branches and reducing services. Bill Justus, vice president of supply chain services for David Weekley Homes, says his distributor contacts “are about one-third what they were a year ago.”
The housing downturn has also forced USG to idle more than 30 percent of its production capacity. So many lumber mills have shut that “supply is equal to demand,” says Shawn Church, editor of Random Lengths, the Eugene, Ore.–based newsletter. If the market recovers faster than expected, wood suppliers could struggle to catch up, says Church, because “some of their attrition was permanent.”
Random Lengths’ softwood lumber composite index, which bottomed in February at $238 per 1,000 board feet, stood at $276 the week of Sept. 12. Nearly every source contacted for this article thinks prices will climb higher through the remainder of this year. But Pulte expects greater “visibility” from suppliers, because “I can’t say for sure how an increase at the gas pump affects the cost of roofing,” says Murphy.