Already hampered by a protracted labor shortage, replacement contractors are also being hit with sharply rising material cost increases that experts fear will further dampen growth.
“It’s the perfect storm on the cost side of the equation,” said Paul Emrath, NAHB economist.
That perfect storm appears to be worsening as President Trump threatens more tariffs beyond steel and aluminum and countries retaliate with their own increased tariffs. In the midst of this brewing trade war, the May increase in prices paid for residential construction goods was the fifth consecutive monthly increase. The index has already risen 5.8% in 2018 and sits 8.3% higher than it did in May 2017, noted David Logan, another NAHB economist. Iron and steel prices are up almost 13% and mill product prices are up 11%.
Other experts are sounding the materials price increase alarm as well. “Prices jumped at double-digit annual rates for metals, lumber and plywood, and diesel fuel, while ready-mixed concrete, asphalt paving and roofing materials also had unusually large increases,” said Ken Simonson, chief economist for the Associated General Contractors of America.
The increases are even worse year over year. From May 2017 to May 2018, the producer price index rose 17.3% for aluminum mill shapes and 10.5% for steel mill products. Other prices rose sharply in that time period as well: diesel fuel jumped 44.5% while asphalt felts and coatings rose 8.9%, the AGC of America reported.
The AGC noted that the U.S. imposed steel and aluminum tariffs on imports from Canada and Mexico on May 31 and the impact from those tariffs are not yet reflected. Thus, prices could jump even higher in coming months and the AGC warned that the construction industry “will bear a heavy share of the tariff’s costs.”
Even before tariffs took effect, they triggered a surge of orders that mills say exceeds current capacity, which could cause construction delays, budget problems and even cancellation of projects, the AGC warned.
Many contractors already find themselves having to push projects out due to labor shortages. In fact, more than 51% of remodelers are turning down some projects due to the labor shortage and 35% are losing or canceling sales altogether, according to NAHB surveys.
As materials costs continue rising and jobs get pushed further out, contractors may find themselves having to absorb higher costs since prices may not reflect contracts signed months ago. “As the owner what scares me is a backlog of $2 million in projects that are sold and what happens if materials prices keep going up?” said Rob Watson, owner, Innovative Kitchen & Bath “I fear what will happen if we get too far ahead of ourselves.”
Even contractors who don’t find themselves in that bind may have trouble with “sticker shock” as materials prices rise, Emrath said. He suggested contractors start educating customers early in the process to prepare them for bids that will likely be higher than expected.
“Try to caution them early so the sticker shock won’t be so extreme,” he said.
