If the recovery from the recession has been characterized as slow and painful, there is one sector where things have now returned to the pre-crisis standards.
Prices for building materials have soared in the last one year and a half. Indeed, the most-essential ones, such as gypsum, softwood lumber and OSB, have recovered almost 90 percent of the loss of value they suffered during the housing bust. But what normally would have been a positive sign for the construction sector, now signifies a considerable hurdle.
With prices of new houses not following the same sharp trajectory, homebuilders have been forced to absorb the additional costs. And in order to retain their already squeezed profit margins, for general contractors imposing a hiring freeze has been the easiest course of action. Simply put, that means fewer jobs in the industry spearheading so far the recovery of the U.S. economy.
“I don’t think of hiring new people now,” said Juan Carlos Ramos, owner of a small home-building/remodeling firm in Matawan, New Jersey. “Smaller means more efficient.”
In the past twelve months Mr. Ramos has seen his clientele getting bigger and lately he often finds himself having difficulty in keeping up with the increased workload. Yet he is well aware that under current circumstances he cannot afford the 10 full-time employees he used to have on his payroll before the collapse of the market. Instead, when he needs additional help for specific jobs, he opts to hire people on a temporary basis.
“Hiring only on contract has become the essence of this business,” said James Gaines, an economist at the Real Estate Center of the Texas A&M University. “The rising costs scare those guys (the homebuilders.)”
Although growing demand for construction has been an important factor, the recent price hike reflects mostly the inadequate capacity on the supply side, which -like the rest of the construction sector- were forced to downsize during the recession years.
“A lot of the material supplying companies went out of business. As a result, the capacity is simply not enough to meet the demand,” Mr. Gaines said.
Some market analysts speculate that suppliers will not be increasing their output before they make sure that the recent growth in demand is not temporary. However, others point to the practical struggles suppliers are facing in their attempt to restore their capacity and build up their distribution networks from scratch.
“It’s easy to reopen a lumber mill, but it’s way much harder to reopen a copper mine,” said Ken Simonson, chief economist for the Associated General Contractors of America (AGCA). “The rise of the demand was too sharp.”
Other significant problems include higher fuel costs and the fact numerous skilled workers in the building materials industry left for more stable jobs during the recession.
“The labor cost has gone up because people left the production of materials. To get back on business, it’s a significant cost,” said Mr. Gaines. “Fuels have also risen considerably. The building materials are transported by trucks and the costs have gone higher.”
So far the rise in prices has mostly been swallowed by the contractors, who struggled to regain their competiveness in the post-recession world and learnt how to keep their bids low enough to win contracts. But homeowners will soon have to bear more of the weight.
“Costs eventually will be passed to buyers,” said Joel Naroff, president and founder of Naroff Economic Advisors, a strategic economic consulting firm. “In the big houses it’s easy to hide a lot of costs. But it’s tougher with the small homes.”
Drawing from his experience, Mr. Ramos agreed that in big projects his clients are usually more willing to forget the increased costs.
“Customers want to pay if it’s about their primary home. They don’t mind,” he said. But if it’s for the cottage or the second house, they want to stay on budget.”
Nevertheless, if the domestic supply chain does not recover quickly, foreign suppliers might come to the rescue of the U.S. consumers. Some European companies had long sought for a chance to get into the American building material market and now thanks to a weaker Euro (because of the continuous financial upheaval of the continent) they have found themselves in a more competitive position.
“The weakness of Euro has made European companies much more competitive in the U.S. market. It has provided a window of opportunity,” Mr. Naroff said. “In every dark situation, there is always some silver lining.”
For the unemployed American construction workers this realization offers little consolation. But with contractors having learnt to do more with less for so many years, their job prospects are unlikely improve in the near future.
“I don’t want to go back to where I was before the crisis,” said Mr. Ramos, explaining how in lean times he even mastered Social Media to attract new clients. “We just have to be more efficient.”
The View from New York
While in the rest of the U.S. the rising material prices have a significant effect, in the affluent New York market other costs are more important. Jacob Karol, an interior designer and founder of Quba Design, explains: