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The Honolulu Advertiser
Posted on: Sunday, April 18, 2010

Home builders' costs climbing

By Alan Yonan Jr.
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Higher lumber prices have boosted the cost of building a home even though labor costs have fallen.

ALAN YONAN JR. | The Honolulu Advertiser

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After two years of sluggish business, local home builders and contractors are now being dealt another blow: rising prices for lumber and other construction materials.

One of the main components in a new house, framing lumber, has risen in price nationally by about 70 percent since last spring and nearly 40 percent since the start of the year, according to a Random Lengths, an Oregon-based lumber-price tracker. Last week's price of $342 per 1,000 board feet was the highest in four years.

Local construction industry participants say they also are seeing big increases in the costs of plywood, drywall, steel and plastic and copper piping.

"We've seen cost of most materials go up. If you add in the higher transportation costs, the rising prices are adding more to the cost of a job," said Steve Whitty, owner of Whitty Construction.

Rising costs add a level of risk to contractors and home builders, who deliver a quote to their customers based on prices at the beginning of the job. That puts them in a difficult position if the cost of materials rise during the course of the project. They either have to to negotiate a higher price with the customer or absorb the cost.

"I personally will eat that cost," Whitty said. "That's my philosophy . But contractors can also gain if prices go down."

Although rising prices of construction materials may create short-term difficulties for contractors and home builders, over the longer term higher costs are eventually passed through to consumers.

Whitty said the materials for a typical kitchen renovation cost about 5 percent more today than a year ago. But customers are saving on labor because the lack of business is forcing contractors to bid more competitively on jobs, he said.

In the case of a major builder like Gentry Homes some of the short-term price risk for materials is borne by the subcontractors it hires for jobs like framing and drywall hanging, said Bob Brant, the company's president and chief executive officer.

"We don't buy the materials directly. Our subcontractors calculate that in the contracts we negotiate with them so they watch the prices pretty closely," he said. "But in the end all the costs get passed along to the consumer."

The forces behind rising lumber prices can be traced back to the collapse of the home construction market in 2008, according to the National Association of Homebuilders.

Mills in both the U.S. and Canada slashed production as demand for lumber fell. Many mills shut down lines or entire operations because persistently low lumber prices were making their operations uneconomic, according to the NAHB. The price of framing lumber fell below $200 per 1,000 board feet in late 2008 and early 2009.

At the same time, Mainland lumber distributors thinned their inventories to hold down costs, said Bernard Markstein, National Association of Homebuilders senior economist.

"And like the distributors, most mills also had relatively low levels of inventory for the same reasons to keep costs down, or at the behest of their lenders," Markstein said.

As the lumber distributors began to rebuild their inventories for this year's spring building season, prices jumped.

Lumber mills didn't want to reopen a shuttered plant or rehire workers just because of what might be a temporary spike in prices, Markstein said. So mill operators had difficulty in responding to increased orders, he said.

"It is not unusual to see lumber prices move upwards in the first quarter of a year as construction comes out of the winter doldrums and begins to ramp up for the spring building season," Markstein said.

"However, a rapid increase in prices of this order when the residential construction activity remains near historically low levels is unusual."

Timber operations have begun to ramp up production to meet rising demand, a process that could take six to eight weeks, Markstein said.

"Builders may have to wait until June before they see some relief from current high lumber prices," he said.

Its not just lumber prices that are on the rise, said Ken Simonson, chief economist for the Associated General Contractors of America. He said price increases are occurring with other materials a trend he attributes to both the actual rise in demand, and an anticipated further rise in demand.

The country's two largest makers of drywall panels, USG Corp. and National Gypsum, both increased their prices by 20 percent in March, Simonson said.

Although the rise in lumber prices has been steep on a percentage basis, the actual level is still relatively low historically, said Carl Liliquist, chief executive of local distributor Honsador Lumber.

"A year ago lumber prices were the lowest they had been since the 1980s," he said. "Nobody was worried about it when prices were going down. That drop was not sustainable," he said.

Although business is modestly better than a year ago, "its still a very depressed market," Liliquist said.

"This one's been a brute. It's the worst I've seen since the '81 recession."

One beneficiary of the high lumber prices has been Re-Use Hawaii, a company that has been selling recycled construction materials since 2006.

"We've had a steady increase in sales since we opened," said co-founder Quinn Vittum. "I would've anticipated even higher sales if not for the recession."

The prices for some of its recycled lumber is far below the market rate, he said. For example, Re-Use Hawaii sells 8-foot pieces of redwood tongue-and-groove siding for $16 that would cost $40 new, he said.

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