Around the House: Don't expect huge Lake County construction price drops soon
As summer ends, the inflationary picture continues to moderate overall. Many wishful new home buyers and remodelers are sitting on the sidelines, believing that within the next few months, there will be a significant price capitulation in construction costs. Unless the fundamentals in the construction industry change quickly, that may truly be more of a hope than reality.
Since April 2005, RoMac Building Supply has been publishing the Whole House Commodity Index free to builders and contractors across the country. This index charts the actual wholesale structural supply costs from the foundation to the rooftop to build a 2,200-square-foot home in Lake County.
This is seen by many in the industry as one of the best and most accurate forecasters of actual construction costs because it charts pricing at the wholesale level, which gives builders a forecast of pricing for the next 30 to 45 days. The Index does not include labor, décor, plumbing, electrical, and HVAC but experience indicates these markets somewhat follow the complete direction of other sectors.
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In mid-August, after four months of decline, the RoMac Building Supply Whole House Commodity Index increased 3.3 percent as core wood commodities seemed to have hit bottom, and in fact, those markets are firming. The wood commodity markets have masked the overall inflationary picture, which has hit the building material sector due to much higher energy, trucking, and labor costs. The other key fact about this report is that its costs are 27 percent more than the previous year, and in the fall, prices made a significant price run-up.
There are four main reasons why price capitulations in the construction industry will be very slow to occur, especially in Florida:
Nationally, and more so in Florida, there is a true housing shortage from a decade of underbidding. Despite higher interest rates, a new normal and acceptance of these rates will occur, and people will enter the markets. The significant number of cash buyers in Florida creates a different demand equation.
The overall economy and inflation picture are improving in late summer, and the rally on Wall Street, if it continues, will boost consumer sentiment. Lower gas prices are fuel for the housing industry.
Overall, commodity and raw material prices remain strong, and while not at the record levels of the Spring, these markets are far from historic bottoms.
Probably the biggest factor is labor costs. While talk of recession is debated, one aspect that does not say recession is the red-hot labor markets. With unemployment at 3.6 percent, wages going up, and millions of job openings remaining unfilled, that undercuts any real recession arguments. In the construction industry, labor costs are one of the biggest pricing drivers due to the less reliance on technology.
Finally, the costs of land and government building and impact fees are not going down. The Lake County Board of County Commissioners is proposing to increase impact fees to the maximum level allowed by the state.
There are a couple of wildcards that will probably add to the pressure of costs in the construction industry. The first, potentially most sudden, would be a couple of intense hurricanes striking the United States in September or October.
Through mid-August, it has been quiet, but it only takes a couple of storms. Longer-term is the push by the Federal and State governments to address housing affordability. It appears affordable housing programs may be the focus of next year, and no one disagrees this huge problem must be addressed.
So, if you are sitting on the sidelines for huge drops in construction costs, my advice is to get a comfortable chair and a good book, this could be a while.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc., and the host of the “Around the House” Show, which can be seen at AroundtheHouse.TV.
This article originally appeared on Daily Commercial: Lake County, Florida won't see construction prices dropping just yet
