Lower construction costs, interest rates may not hold out

While the custom homebuilding business continues to sludge through the current residential downturn, local custom builders like Fort Worth’s V Fine Homes President Patrick Towle say their remodeling divisions are seeing a noticeable uptick thanks to lower construction costs and interest rates.

But that may not last for much longer according to an analysis just released of the U.S. Bureau of Labor Statistics’ most recent numbers.

Construction costs, which had been relatively low for much of the past year thanks to a decrease in demand throughout the nation, are beginning to climb, signaling a potential end to the ‘limited-time’ sale for construction, according to an analysis of the latest U.S. Bureau of Labor Statistics’ Producer Price Index completed by the Associated General Contractors of America, AGC.

The analysis by Ken Simonson, chief economist for the AGC, found “significant upward movements” between August and September in the prices of copper, which rose 10 percent, aluminum, which rose 2 percent, and steel, which saw a 3 percent increase.

In the report, Simonson said since the prices were collected a month ago, copper, aluminum and diesel fuel have moved to multi-month highs.

“The days of construction estimates coming in 20 percent under estimate may soon be coming to an end,” Simonson said in the report. “These figures serve as an important reminder that governments and developers looking for a good deal on construction should act quickly before having to pay significantly more for their projects.”

In general, the AGC report shows most construction materials through 2003 recorded modest increases and many decreases in price, similar to the Consumer Price Index, or CPI, which rose 2.4 percent in 2002 and 1.9 percent in 2003. Beginning in 2004, however, many construction materials had years with double-digit increases, whereas the CPI has continued to rise at a 0.1 to 4.1 percent annual rate. After peaking in July-August 2008, prices for diesel fuel, asphalt, steel, copper and other materials dropped sharply through early 2009.

Prices for other construction materials also rose in September as compared to the previous month, the report showed. For example, the cost of plastic construction products rose 1.2 percent, the cost of pre-stressed concrete products rose by 1.5 percent, and iron and steel pipe and tube increased by 1.2 percent. Some construction materials prices did continue to decline, such as gypsum (down 1.2 percent) and plywood (down 0.3 percent).

Simonson said the producer price data serves as a reminder that “private owners and public agencies should accelerate any plans they have for construction to take advantage of materials costs that remain generally below year-ago levels but which are rapidly reversing their slide.”

Even so, the news might not be all bad for local home builders.

Towle said costs haven’t necessarily driven demand for remodels for his clients as much as assisted in the remodel.

“I don’t know that most people want to remodel because of the pricing. A lot of people are looking at their house and saying, ‘there’s a lot I like about this house or this neighborhood’ and that’s a factor too,” he said. “We’re seeing all kinds of jobs, big and small, and for some people who want to expand but don’t want to sell right now, this is a good time to remodel.”

John Giordano with Hahnfeld, Giordano, Cocanower, or HGC Real Estate Services LLC, said his custom business has grown by 54 percent since last year with the remodeling division, which was started in 2008, seeing a 300 percent growth.

Giordano said while some clients are more knowledgeable than others about the state of the home building industry, the majority of them know this is a good time to get a deal.

“People are really staying in tune with the market and they understand what low interest rates and low building costs means to them,” he said. “They know things are probably slow on the production end and it’s prime time for them to come and take advantage of that.”

And the low building costs aren’t just motivating those ‘in the know’ clients, Giordano said.

“For those people who don’t really know what’s going on, they come in thinking about doing some renovations, on the fence, and we sit down and explain how low the costs are right now and a light bulb goes off for them,” he said. “It helps them decide.”

But even if pricing does inch up, Giordano said interest rates will continue to be a driving factor.

“It’s not just about the construction costs or just about the interest rates. People just know this is a good time to remodel,” he said. “It’s a combination of everything and it’s an alternative to building something new.”