Will Rising Costs in Building Materials Stunt Market Growth?

It’s been reported in recent months that building permits are on the rise (recently at their highest level since August 2008) and consumer interest in new construction is higher than it’s been in years, along with builder confidence.  The housing market is continuing its comeback, and this means building will continue to be in higher and higher demand.

One foreseeable problem in this generally positive situation, however, is that many essential materials for building both single and multiple family homes are becoming increasingly expensive.  With rising costs for all of their materials, as well as some labor-related expenses, it may be difficult for construction companies to continue keeping up with the high demand for new properties.  Labor cost pressures are particularly acute in certain regions or locations in the U.S., but the strains of material price increases are being felt across the board.

The Bureau of Labor Statistics released a recent Producer Price Index which included figures on common building materials.  According to this report, in the twelve months from July 2011 to July 2012, materials prices rose nearly 2%.  Particularly sharp increases were seen in key materials such as gypsum, insulation, and lumber.  Another limiting factor in builder’s ability to manage the many new properties that have been and will be requested is the low availability of land, especially land that has access to all necessary utilities and conventional amenities.

While in past markets, builders could have perhaps just raised their prices to combat the increased materials and land costs, it’s been difficult for an accurate home value to even be determined.  There are so few current newly built homes due to the struggling market over the past few years that appraisers have found it essential to compare with older, often distressed homes in the surrounding area.  Due to the abnormally low resulting appraisal value, hopeful buyers can’t secure the financing they would need to meet a builder’s higher price.

While rising building costs may throw a curve ball into positive construction trends, experts feel confident that the market will find its footing.

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