SPECIAL FOCUS >> RISING CONSTRUCTION COSTS

What’s Up, What’s Down

BY BENDIX ANDERSON

AFFORDABLE HOUSING FINANCE • OCTOBER 2007

After several years of vertigo from soaring construction costs, developers are getting some relief as prices drop for lumber and gypsum wallboard. The news isn’t all rosy, though: Prices for steel, copper, and concrete are still rising.

Lumber gets cheaper

The wood products used in homebuilding, from structural panels to plywood, are much more affordable than just a few years ago. For example, in August the price of framing lumber was roughly half its peak of $473 per 1,000 board feet (MBF) in August 2004, and is expected to stay low.

“It will be a year before the housing market starts to revive, and until it does, the framing lumber market has no one to sell to,” said Kenneth D. Simonson, chief economist for the Associated General Contractors of America (AGC).

Over the last decade, the price of framing lumber veered back and forth from a little more than $250 to almost $500 per MBF. Prices slid below $300 last year.

Fire sale on gypsum wallboard

The price of gypsum wallboard is likely to fall further this year, but not by much, said Markstein.

By July, prices had already dropped more than 20 percent from their all-time high a year before, according to data from the Department of Labor’s producer price index. Prices are likely to inch downward this year as housing starts remain depressed and new wallboard factories open their doors. But manufacturers cannot afford to repeat the deep cuts they made last year and still make a profit, said Markstein.

For example, U.S. Gypsum’s average realized selling price for gypsum wallboard was $142 per thousand square feet during the second quarter of 2007, compared to $183 per thousand square feet a year earlier, a decline of nearly 25 percent.

In 2007, developers of single-family homes, one of the largest users of wallboard, will put even more downward pressure on prices by using just 34 billion square feet of wallboard. That’s 3.6 billion square feet less than in 2006 and 6 billion less than in 2005. Developers of offices and shopping malls won’t use all the excess, creating a massive net loss in demand for wallboard, Markstein said.

Concrete and cement costs swell

Unless the world economy spirals into global recession, concrete and cement prices are likely to increase by up to 5 percent over the next year, close to the previous year’s pace, Simonson said.

Over the 12 months ended in July, producer prices rose 4.5 percent for cement and 3.5 percent for concrete. Average prices rose faster in 20 top markets, growing 8.1 percent to reach $100 per ton of cement over the 12 months that ended in August, according to a survey by Engineering News Record (ENR), a construction economics newsletter.

Prices began their upswing in 2001 after nearly two decades of sluggish increases. Since then, producer prices for cement have grown by more than a third.

The demand from growing economies like China and India is likely to keep upward pressure on prices. Road building and hotel projects in the U.S. will also increase demand. “Even though there is a slump in residential construction, there is growth in nonresidential building,” said Markstein.

Steel and copper prices rise

The metals used by apartment developers have been especially sensitive to demand from overseas and, in the case of copper, a shortage of supplies.

The cost of copper and brass mill shapes, used for plumbing in many homes, will stay high and may even inch higher over the next year. Labor disputes in the copper mining countries of South America drove producer prices in July to almost three times their level in 2003. The spot price of copper reached $3.23 per pound on Aug. 22. That’s a 13 percent gain from the beginning of the year, according to data from Trade Service Co., a research firm.

The price of steel mill products will also rise in the next 12 months, but the damage will be less severe than in prior years, with a price increase of less than 10 percent, said Simonson of AGC.

Prices of steel mill products jumped 71 percent between July 2003 and July 2007, but the increase slowed to a 3.2 percent pace over the 12 months ended in July.

The average price of steel products grew 5.3 percent to reach $40.68 per 100 pounds in the 12 months that ended in August, according to ENR’s survey.

Price increases for metal and concrete will put the most pressure on midrise and rehabilitation projects that rely most on those materials, while cost increases will be easiest on low-rise developments like stick-built townhouses and garden apartments that rely on lumber, Markstein said.