Rising costs of construction are often a point of primary concern for many people. Builders, sellers, homeowners, and homebuyers are all affected by this. In fact, according to the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau, tight inventory slowed the housing market by 9.5% from March to April. Many factors come into play when it comes to these record-high costs of property construction.
Even though the housing market is hot, kick-starting construction is a major obstacle for homebuilders. Rising construction costs are not only exclusive to residential/single-family homes but also commercial properties.
Rising Cost of Steel
Steel: one of the most common construction materials for commercial buildings. According to CBRE, out of all the commercial real estate services, steel produces 16% of building costs for the average commercial project; however, as of March, steel suppliers are price gouging steel by $300 to $400/ ton. This significant leap in cost raises significant roadblocks for buyers, builders, and contractors.
U.S. steel prices are reportedly 68% higher than the global market price. Prices will remain high throughout 2021. Here are three reasons why:
- Since China is currently the world’s largest steel producer, the lockdowns have been the primary catalyst to the price increases.
- The limited supply is nowhere near able to accommodate the current steel demand. In 2020, economic slowdown paused construction projects, steel production, and steel consumption. To reflect the small demand for steel, producers cut the supply. Now that the economy is picking up speed, steel is in hot demand to be used in resumed projects. However, producers are still struggling to keep up the pace.
- New tariffs plague the price spike even further. Introduced in 2018, a 25% tariff is tacked onto any imported steel to promote U.S. steel manufacturers. To projects looking to outsource steel from cheaper regions, this tax puts an even heavier financial burden on construction budgets.
Larger developers usually have better-negotiating positions to secure a steady supply of steel at a reasonable price. On the other hand, smaller developers or contractors lack the platform to get the better end of the bargain. Given both situations, the rising prices of steel will either directly increase development costs or completely halt construction projects.
Lumber Prices Add Fuel to the Fire
In the same sequence of events, lumber has become astonishingly expensive. When COVID-19 broke out, sawmills cut production and adjusted their inventory in fear of a housing crash. This crash never happened. The demand for new homes and construction supplies boomed. Americans were rushing to home improvement stores to buy materials for do-it-yourself projects while millennials were hitting their peak homebuying years. Although southern loggers are pushing wood production at a 13-year high, the price of lumber is still up 288%. Even if lumber prices are gradually declining, the feverish demand in new homes makes this price dip meaningless.
With the circumstances of COVID-19 and the increasing cost of supplies, construction on new homes hit the brakes. At the height of the pandemic, when the construction market was in a lull, workers were left without jobs; however, now that economic recovery is picking up speed, builders are still unable to start projects fast enough because labor demands remain absent. Even if the price of materials drops to a reasonable price, the labor shortage will still be a point of concern for builders.
Construction Costs Force Home Buyers to Pay the Price
The historic run-up of construction costs often forces builders to pull back since many homebuyers cannot match the outrageous market prices. With the materials being overpriced, contractors reduce the risk of rising materials costs through construction contingencies for price increases in contracts. Buyers who agree to terms that include price increases could potentially lose more money than planned. In an interview with Forbes, Mickeal Soliman, the CEO of New Jersey General Contractors and Builders, explains why he chose not to take new clients while the prices of materials remain at such high levels.
If buyers are not paying extra costs through construction contingencies, they will be spending large sums of money on the outrageous housing prices. While builders are constantly struggling with material shortages and lack of available skilled labor, the upward pressure on home prices and the demand continues to rise in tandem during this low-inventory market.