Costs of home construction up 20% from last year

Lumber prices have vacillated recently, but other costs for residential construction materials and related transportation rose in the past month, the National Association of Home Builders noted in a new report.

That resulted in a net 1.8% monthly gain in the cost of goods used in residential construction and renovation during May, and represented an increase of 19.4% compared to a year earlier, the analysis of Producer Price Index data showed.

While the PPI for softwood lumber was up only 0.4% in May on a seasonally adjusted basis and had dropped 15.6% in April, other materials saw larger monthly gains since March. Steel mill products had their second consecutive gain of 10.7%, gypsum rose 7.1%. One of the drivers of freight costs was a 21.5% increase in water transportation over the last two months.

“Lumber is in a league by itself,” said David Logan, a senior economist at the NAHB, in an interview. “Some of the materials that make up the largest percentage of inputs in a home are still rising in price at high levels.”

That continuing net increase, which comes amid a greater-than-expected tightening in monetary policy, points to an ongoing trend: lenders are financing construction and renovation to account for cost overruns in builder contracts.

“It’s recognized that things take longer [and cost more], so lender guidelines are much more flexible,” said Sean Faries, CEO at Land Gorilla, a provider of construction lending systems.

Mortgage companies are more often offering contingencies when they finance construction or renovation, including discretionary reserve accounts that can cover cost-overruns and interest reserves that give borrowers more flexibility on payments as they manage uncertainties in the timeline in moving from one home to another. The lender may also put language into a contract that accommodates a potential need to pay suppliers directly and earlier than normal, Fairies said.

Some of the recent softening in home prices has been a response to a slight decrease in housing demand due to rising rates. Generally lenders and building experts don’t foresee that providing immediate relief from constraints on affordability. It could even intensify the crunch in entry-level housing because it could further discourage move-ups. However, there’s some uncertainty in the forecasts for the coming year.

“Right now is just such an amazing point that we look at and we get to see this massive…pent -up demand for housing, but some…factors like interest rates and inflation and supply chain [could] really impact that,” Faries said. “How they're mitigated over the next 12 months is going to be very telling.”