As if homebuilders didn't have enough to worry about with plunging home prices and rising foreclosures, the surge in oil prices is driving up the cost of key construction materials and further eroding homebuyers' confidence.
Prices have gone up for steel, aluminum, copper, concrete, brick, asphalt and plumbing fixtures, among other materials, and homebuilders are feeling pressure from suppliers to foot the bill. In sum, the wholesale cost of building materials for new home construction rose 3.4 percent overall in April from a year earlier, according to the Labor Department.
“Any material that is petroleum-based or transportation-intensive will have pricing pressure during periods of rising oil prices,” said Tony Callahan, senior vice president of Purchasing, Planning & Design for Atlanta-based Beazer Homes USA Inc. “Manufacturers are trying to push cost increases through for materials like asphalt roof shingles, carpet, insulation.”
The price increases represent another hurdle for homebuilders, which already are reeling from 40 percent buyer cancellation rates and billions of dollars in write-downs on undeveloped land. The companies are already struggling through the second year of a housing bust that some industry analysts say isn't likely to improve before 2010.
Earlier this week, two rating agencies slashed the debt ratings for several builders. The debt of companies including Ryland, D.R. Horton and Centex has been branded as “junk.”
Many builders have moved to slash costs by switching to less expensive materials like flooring and kitchen countertops, for example. They've also shifted to building smaller houses that cost less to build.
Callahan said Beazer is favoring suppliers who work to cut costs by reducing the number of trips to a job site, for example, or reducing how much of the material is wasted.
Oil-related materials such as asphalt, used in roofing, siding, and for paving driveways, have seen the biggest percentage jump in costs.
Asphalt was up almost 26 percent in April from a year earlier. At the same time, diesel fuel, used by trucks and heavy machinery on construction sites, saw the biggest price spike in April – a jump of about 66 percent.
If oil prices continue to surge, homebuilders may not be able to avoid higher costs. They also may have to tack those costs onto the purchase price of their homes.