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Perfect Storm of Price Hikes Looms for Homebuilders

    The construction industry is bracing itself for a potential perfect storm of price increases, with the cost of building materials set to rise by 4-6% over the next 12 months. This surge in costs could be exacerbated by tariffs on Canada and Mexico, which have been temporarily paused but are still looming large.

    According to CoreLogic's latest report, even small increments in material costs can make it increasingly difficult for builders to turn a profit. As a result, finding ways to cut costs will become critical for homebuilders. "The economics are now upside down," said Pete Carroll, EVP of public policy and industry relations at CoreLogic. "Incremental increases in the cost of materials, labor, and equipment make it that much more difficult to build a home profitably."

    A 10% overall increase in building material costs is predicted by CoreLogic, with household fixtures such as appliances and cabinetry potentially rising by 10-20%. This has sparked concerns about a shortage of supply, exacerbating the affordability crisis. "If we're going to create and restore homeownership opportunities for families, we need to fill in this single-family starter home segment that's missing," Carroll added.

    Regulatory reform is seen as key to reducing costs and improving housing attainability. Robert Dietz, chief economist at the National Association of Home Builders, notes that policies aimed at reducing land development and construction costs are now more critical than ever. "This dual set of risks has been reflected in financial markets, with stocks valuing growth and efficiency but bond markets reflecting inflation and budget deficit concerns," he said.

    However, buying US-made materials may not be a silver bullet for builders. A sudden increase in demand could lead to supply chain bottlenecks, resulting in short-term price hikes. "It's still early, but we are seeing signs that price surges could appear in the current dynamic environment," warned Jay Thies, CoreLogic's VP of pricing analysis and delivery.

    Not all building materials will be equally affected, with most roofing products already produced domestically. The new administration's push to boost domestic oil production may even lead to a slight decline in raw goods costs for roofing materials.