The natural disasters of Hurricanes Katrina and Rita have left upwards of
200,000 homes either destroyed or uninhabitable and needing rebuilding. This
country has never seen a disaster on this scale, so the impacts are hard to
estimate. The National Association of Home Builders released a report on
September 2, 2005 (see http://www.nahb.org/news_details.aspx?sectionID=148&newsID=1572
for the full report) providing historical price increases for building materials
after recent major hurricanes. The price increase ranged from 16% to 45%,
implying that increases in building supplies are almost certain to occur again.
Spot prices in lumber jumped over 10% in the days following Hurricane Katrina
as the markets realized the widespread swath of destruction that the weather
created. While this was certainly in anticipation of increased demand, the real
demand trigger is many months away. Until areas are cleaned up and made
inhabitable again, rebuilding cannot and will not occur. Therefore, do not
expect shortages in lumber, plywood, and drywall until spring 2006 at the
earliest.
Three factors will impact future demand of basic building materials:
The speed of the insurance industry’s and governmental responses.
While up to $100 billion in uninsured losses may occur (http://www.foxnews.com/story/0,2933,170874,00.html)
and at least $20 billion in insured losses may occur (http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/09-02-2005/0004099642&EDATE=),
homeowners are unlikely to receive compensation until adjusters can make
their way to affected areas. Additionally, the government will likely step
in to ameliorate the uninsured losses to some extent, but such action will
take time to work its way to the affected.
The rate of permanent displacement. If displaced citizens decide to
permanently relocate to areas such as Baton Route and Houston, those areas
will need to increase housing supply to meet the new, unexpected demand.
This will create surges in need for building supplies.
Speculation in affected areas, particularly New Orleans. The
displaced may decide to sell their properties for reduced prices,
potentially fueling speculation. As real estate investors look to turn a
profit from their purchases, they will need to either rehabilitate or
rebuild on the properties, creating new demand for supplies.
Another factor to consider is mortgage rates. The Federal Reserve Bank had
been on a trajectory to increase rates before Katrina, and while the damage was
widespread, it was a relatively small amount compared to national GDP. While the
Fed may temporarily halt the increase in rates, such a slowdown is unlikely to
be long-term as long as the economy continues its growth. This will mean, in
relative terms, that the cost of building with borrowed money, will increase in
the future, regardless of demand for building materials. Therefore, the two
factors may combine to compound price increases.
What this means for you
If you are considering building a house in the next three years, you may want
to consider starting the process now. Even if you do not plan to actually start
in the near future, builders can order future delivery of supplies now. By
buying now, builders can lock in current prices and hedge the risk of future
increases. Plus, future purchases increase the likelihood of delivery, as
supplies will be allocated to the previously made purchase. In past natural
disasters, shortages of building supplies were widespread. “Six months after
[Hurricane] Ivan, it was really difficult to get drywall and lumber,” says Tony
Glanville, director of construction services at Bridlewood, a Virginia home
builder. By locking in contracts now, you can reduce the chances of facing
supply shortages and price increases in the future.
About the author
Jason Hull is a principal in Bridlewood, a custom home builder serving the
Central Virginia market. Bridlewood builds custom homes and vacation getaways
for discriminating buyers. They are committed to providing the highest levels of
professional service and consistent communication throughout the design and
building process.
Visit http://www.bridlewoodproperties.com
for more information.
