Wood prices have hesitated recentlybut other costs for home building materials and related transportation have increased over the past month, the National Association of Home Builders noted in a new report.
This led to a net monthly gain of 1.8% in the cost of goods used in residential construction and renovation in May, and represented a 19.4% increase over the previous year, according to the analysis of producer price index data.
While the PPI for softwood lumber rose just 0.4% in May on a seasonally adjusted basis and fell 15.6% in April, other materials have seen larger monthly gains since March. . Steel products saw their second straight gain of 10.7%, gypsum rose 7.1%. The 21.5% increase in water transport over the past two months has been one of the drivers of transport costs.
“Wood is in a league of its own,” David Logan, senior economist at NAHB, said in an interview. “Some of the materials that make up the largest percentage of inputs in a home continue to increase at high levels.”
This continued net increase, occurring in the midst of a stronger-than-expected monetary policy tighteningindicates a continuing trend of lenders financing construction and renovation to account for cost overruns in builder contracts.
“It is recognized that things take longer [and cost more]so lender guidelines are much more flexible,” said Sean Faries, CEO of Land Gorilla, a provider of construction lending systems.
Mortgage companies are more often offering contingencies when financing construction or renovations, including discretionary reserve accounts that can cover cost overruns and interest reserves that give borrowers more flexibility over payments as they manage the uncertainties in the timing of moving from one house to another. The lender can also put language in a contract that takes into account a potential need to pay suppliers directly and earlier than normal, Fairies said.
Part of the recent decline in house prices has been a response to a slight drop in demand for housing due to rising interest rates. In general, lenders and construction experts do not plan to provide immediate relief from affordability constraints. It could even intensify the shortage of entry-level housing, as it could further discourage climbs. However, there is some uncertainty in the forecast for the coming year.
“Right now it’s such an incredible point that we’re looking at and we’re seeing this massive…pent up demand for housing, but some…factors like interest rates, inflation and supply chain [could] really impact that,” Faries said. “How they are mitigated over the next 12 months will be very telling.”