Why Are the Costs of Building Materials Still Fluctuating?
Dec 15, 2021
17:00 MIN
Earlier this year, the costs of building materials surged to all-time highs in the United States as demand skyrocketed and supply lagged behind. When their article for Bloomberg was published in June, Marcy Nicholson, Dave Merrill and Cedric Sam noted that “the cost of almost every single item that goes into building a house in the US is soaring.” Months later in the final quarter of 2021, the costs of building materials are still fluctuating. Prices of everything from aluminum and copper to plastic and glass are undulating as market conditions change around the world. Unfortunately, fluctuations in the costs of building materials are not due to any single cause. Many causes are artifacts of the COVID-19 pandemic, which continues to affect the supply of all types of building materials. For example, health measures last year halted production and distribution. This year, production and distribution were halted once more when factories shut down following outbreaks of the COVID-19 Delta variant across Southeast Asia. Other causes of the building materials shortage are rooted in climate change. Storms in the Southern US -- particularly in Louisiana and Texas -- damaged and destroyed equipment and raw materials needed to manufacture paint, plastic and other products. Finally, growing demand for materials and a shortage of shipping containers, seafarers, stevedores and truckers has resulted in an ever-worsening bottleneck. Below, we delve deeper into the many reasons why building materials costs are still fluctuating. In our upcoming article "The Prices of These Six Building Materials Are Still in Flux," we will also take a look at which construction materials are facing a shortage and when we might expect a return to normal prices and distribution. From lumber prices to those of plumbing fixtures, the prices paid by consumers and producers are still unpredictable.
7 Reasons Why the Costs of Building Materials Are Still Rising and Falling
Beginning in March 2020, refineries, factories and manufacturing plants paused production as governments around the world ordered lockdowns in response to the worsening COVID-19 pandemic. While last year’s halted production did affect supply of building materials, it was not the only factor that contributed to shortages and rising prices. Though production has since picked up dramatically, the supply chain is still struggling to recover more than a year later. Choices made by the US government and others abroad, changing sentiments across industry workers and growing demand from consumers have all impacted the costs of building materials in the months since.
#1 Value of the US Dollar is Declining
As mentioned above, decisions made by the US government last year and earlier this year have impacted the costs of building materials and other goods. In his June 2021 article “Buckle Up: 3 Reasons Why Inflation Is Rising” for Forbes, Mike Patton explains how choices made by the Fed in 2020 are still impacting consumer prices today. Patton describes two reasons why “consumer prices are rising at the fastest rate since the Great Recession and the second fastest rate since the early 1980s.” These two reasons are increased money supply and declining value of the US dollar.
According to Patton, when the “Federal Reserve and Federal government flooded the economy with more dollars” after the COVID-19 pandemic struck, inflation rose and the value of the US dollar declined. Patton writes that “whenever the money supply increases too rapidly, and there are too many U.S. dollars in the system, it reduces the value of each dollar.” When there are “too many dollars chasing too few goods” in the US economy, inflation occurs. Patton notes that between January 2020 and April 2021, the M2 money supply grew from $15.41 trillion to $20.11 trillion. This represents an increase of 30% between January 2020 and April 2021. Though Patton notes that flooding the US economy with more dollars “may have boosted the economy and helped avoid a more serious recession, it also contributed to higher inflation.”
Costs Surge Across the Consumer Price Index and the Producer Price Index in 2021
Data from the October Consumer Price Index (CPI) inflation report shows that prices have climbed 6.2% year-over-year, with the gasoline index alone rising more than 6% last month. Costs across the Producer Price Index PPI have also increased significantly. According to a Producer Price Index PPI report from the Bureau of Labor Statistics, the index for final demand goods increased 1.2 percent in October following a 1.3- percent increase in September. The report notes that wholesale prices have risen 8.6% this October when compared to last October.
A Weak US Dollar Means Expensive Imports
When the dollar weakens, the cost of imported goods rises. When the cost of imported goods rises, American companies who source raw materials, equipment and products overseas must pay international suppliers more money than they would have before the dollar weakened. To preserve their profits, companies then pass this extra cost onto consumers.
Boston Consulting Group partner Phillip Heck notes in a 2019 article that “up to 40% of a typical American home is made of imported materials.” As such, Americans can expect the cost of building materials -- and subsequently homes -- to increase whenever the value of the dollar falls. Homeowners and builders are definitely experiencing this phenomenon in 2021. According to Hillary Hoffower in her March 2021 article “Here's everything that could get more expensive in 2021” for Business Insider, “higher raw-materials costs led to an average unexpected price increase of $24,000 for new homes in the past year — on top of the general nationwide rise in housing prices.”
#2 Gas Prices Are Soaring
The cost of natural gas has also risen astronomically over the last year, disrupting a number of markets. Though demand for natural gas was low in 2020 when travel was curtailed, production was halted and remote work became the norm, need across the globe has since surged. In their September 2021 article “Soaring gas prices ripple through heavy industry, supply chain” for Reuters, Bozorgmehr Sharafedin and Susanna Twidale explain that “natural gas prices have risen sharply” around the world for three primary reasons. These include “increasing demand due to a post-pandemic recovery, low gas inventories and tighter than usual gas supplies from Russia.”
Though individuals often focus on how much rising gas prices increase the cost to fill up the tanks in our cars, they actually have the capacity to impact the entire US economy. In her September 2021 article “How Gas Prices Affect the Economy” for Investopedia, Jean Folger explains. Folger writes that “gas is an important input for transportation which directly impacts...businesses that rely on logistics and transportation chains around the globe.” As such, “anything that has to be shipped or transported” -- including many building materials -- “could cost more as gas prices rise.” Similarly, many building materials contain plastics and other elements “based in part on petroleum and refining,” meaning that higher gas prices will result in “higher prices for these materials too.”
Companies Pause Production as Gas Prices Soar
Industries that use natural gas to power their factories and processing plants must also increase the price of their products -- or even stall production -- when energy costs increase. Writing for Reuters in their September 2021 article, Bozorgmehr Sharafedin and Susanna Twidale explain. Sharafedin and Twidale write that “global record high natural gas prices are pushing some energy-intensive companies to curtail production in a trend that is adding to disruptions to global supply chains in some sectors such as food and could result in higher costs being passed on to their customers.” Some of the companies that have “had to suspend or reduce production...as a result of spiking energy prices [include] steel producers, fertilizer manufacturers and glass makers.” This has resulted in a temporary worldwide shortage of some building materials.
#3 There Is a Global Shortage of Shipping Containers
Growing demand for a variety of goods combined with a limited number of port workers around the world has resulted in a global shortage of shipping containers. According to Paul Berger in his August 2021 article “Where Did All the Shipping Containers Go?” for The Wall Street Journal, shipping containers “are harder than ever to find.” Over the summer, “surging demand to restock inventories and a series of shipping disruptions” left thousands of shipping containers “stranded at sea on ships anchored near jammed-up ports.”
In the ensuing months, shipping containers have continued to “stack up at inland freight hubs in the US, Europe and Asia” as international companies have struggled to “cope with cargo flows that at times have overwhelmed their operations.” Berger notes that this shortage of available shipping containers “has contributed to skyrocketing costs and complicated efforts to meet resurgent consumer demand.”
Last Year’s Shipping Container Shortage Continues in 2021
Though this issue began months ago, ships carrying what Berger refers to as “the building blocks of global trade growth” are still backing up ports around the world. Part of the problem is that there are not enough workers at cargo facilities and ports to unpack shipping containers and send them back into circulation. There is also a lack of necessary equipment -- such as chassis and trucks -- for transporting products brought in on cargo ships. Congestion at the ports and further inland have more than doubled the time it takes for shipping containers to travel from Asia to the US. Because of the shortage, the cost to rent a shipping container has skyrocketed.
Writing for NPR’s KCBX on November 16, 2021, Jackie Northam notes that “people are buying so many more goods that it's boosting demand and leading to a shortage of containers, which has sent their prices surging.” Last year, prices increased from “$1,500 for a 20-foot container and $2,800 for a 40-footer in late 2019, up to $3,000/$5,800.” Now the cost to rent these containers averages “$4,000/$6,400, but [has gone] as high as $6,000/$8,000.” In response, retailers have been forced to raise prices on every element featured in construction projects from house paint to steel mill products. Though China -- which Northam writes is “the world’s largest manufacturer of shipping containers” -- has ramped up production significantly since September, “no matter how many there are, the supply chain crisis won’t be solved until the containers are more quickly unloaded and turned around.” This brings us to the ongoing labor crisis, which is also impacting building material prices.
#4 The Labor Crisis is Still Ongoing
Though most factories, shipping companies, ports, warehouses and processing plants have since come back online after they shut down at the height of the pandemic, there are still not enough workers to meet demand for building materials. Labor statistics show that other industries have seen employment in both unskilled and skilled labor return to normal after layoffs placed many American workers on unemployment last year. At the same time, however, the labor shortage in shipping and manufacturing persists.
Understanding the Shipping Labor Shortage
Addressing the shipping labor shortage in his article “The Next Shipping Crisis: A Maritime Labor Shortage” for The Washington Post, Adam Minter explains part of the problem. According to Washington Post writer Adam Minter, “the world’s 1.89 million seafarers operate more than 74,000 merchant ships, providing transportation for roughly 90% of global trade.” While operating these merchant ships is clearly an essential job, Minter notes that it is “also a lonely and dangerous one that requires months at sea, often with little ability to contact home or touch land.” Unfortunately for the shipping industry, Minter writes that “seafarers worldwide are now rethinking their commitment to the trade.”
After a number of shipping disasters last summer left thousands of these workers stranded -- unvaccinated -- for months at sea, industry leaders sounded the alarm that “the pandemic will make it more difficult for them to hire workers for years to come.” The pandemic has already put a damper on hiring in 2021. According to Minter, “COVID made the task of recruiting and retaining seafarers substantially harder,” worsening the global shipping crisis. If more seafarers continue to quit and few choose to enter the industry, “the global supply chain could soon face a more debilitating challenge: a chronic labor shortage.”
Few Workers and High Demand Means Rising Shipping Costs for Building Materials
As mentioned above in the section on shipping containers, lack of port, warehouse and other workers across the transportation industry has also contributed to rising building material prices. In her October 2021 article “Nearly half a million shipping containers are stuck off the coast of Southern California as the ports operate below capacity” for Business Insider, Grace Kay writes that key US ports “are only operating at 60% to 70% capacity” due to shortages of stevedores, “truckers and warehouse operators.” According to Kay, the transportation industry has “struggled to hire enough workers, causing headaches at ports, warehouses, railways, and trucking.” Shipping prices are rising as “companies have fewer workers than before the pandemic but face significantly more work due to the boom in demand for goods since the pandemic started.”
Examining the Manufacturing Labor Shortage
A shortage of factory workers has also contributed to the high costs of building materials in 2021. In her October 2021 article “Five Reasons Labor Shortages Are Impacting Supply Chains” for Forbes, Forbes Councils Member Kristen Fowler elaborates. As mentioned above, “the effects of this labor shortage are not distributed equally,” with some industries experiencing a return to normal much faster than others. To explain this, Fowler references the fact that “a negative public perception of the manufacturing and supply chain industries” has developed over the last few years. According to Fowler, “while employees flock to attractive industries such as technology or health care, manufacturing employment has dipped by nearly 400,000 from pre-pandemic levels.” Unlike other industries, workers in manufacturing tend to skew older because the “less-than-fabulous image of supply chain and manufacturing is most prevalent among the younger generations.” When the pandemic resulted in layoffs for thousands of manufacturing workers, many chose to use their “unemployment as a natural segue into early retirement.”
New technology in manufacturing has also worsened the labor shortage. Contrary to popular belief, Fowler notes that “the introduction of automation has actually increased the number of open jobs” rather than eliminating them. This has changed the type of workers needed in manufacturing, “blurring the line between white and blue collars.” Now, employers need workers who “bring the blend of technical, physical and soft skills required to thrive in a technologically advancing environment.” Fowler writes that the abilities and education now needed by manufacturing workers “and the lack of candidates who meet them have created a skills gap.” Because of this, employers in the manufacturing and shipping industries “do not have the labor or capacity to effectively manage...U.S. imports.”
#5 Demand for Building Materials Keeps Rising
Price increases have also resulted from skyrocketing demand for building materials, which even when seasonally adjusted is incredibly high. Homeowners are embarking on a record number of new projects -- whether they are painting their living room, adding a deck or building a brand new home. In his September 2020 broadcast “Why Home Improvement Has Surged And How It's Changing America” for NPR, Frank Morris explains. According to Morris, there are a few reasons why home improvement projects and new home builds have surged since the pandemic began last February. One factor -- of course -- in the need for more new homes is the fact that interest rates on mortgages are so incredibly low. Another contributor to the building boom is that “Americans have been forced to use their houses more -- and differently” since the COVID-19 pandemic started. Though home improvement spending has “been on a long steady rise” over the last few years, spending reached “all-time highs” last December.
Demand Continues to Skyrocket Despite Rising Prices
Last month, Lexie Pelchen and Samantha Allen noted that demand is still rising a year after Morris’ broadcast. Writing for Forbes in their article “Home Improvement, Interrupted: Labor And Material Shortages Stall Home Renovations In Pandemic Era,” Allen and Pelchen write that “despite the labor and materials shortages and increased costs for remodels and upgrades, home improvement projects have persisted, and at a rate that is higher than ever.” Referencing the latest Leading Indicator of Remodeling Activity (LIRA) report from Harvard University’s Joint Center for Housing Studies, Allen and Pelchen note “‘homeowner improvement and maintenance spending are set to accelerate in the second half of [2021] and remain elevated through mid-year 2022.’” The report estimates “‘annual growth in home renovation and repair expenditures will reach 8.6% by the second quarter of next year.’”
To accommodate rising prices due to increased demand and less available materials, homeowners actually increased their home improvement budgets. According to Allen and Pelchen, “the average household spending on home improvement projects in 2020 was $13,138, a drastic increase from the average spending in 2019 of $9,081.” Allen and Pelchen believe homeowners are comfortable spending more on home improvement projects and new builds in 2021 because they spent less on other products and activities during the pandemic. American homeowners were unable to spend as much last year and most of this year on “vacations, dining out, movies and other forms of entertainment” they typically allocate a significant part of their budget to. Pelchen and Allen believe this is one contributing factor to the ever-growing demand for building materials.
#6 Unexpected Storms Halted Production Earlier This Year
Winter Storm Uri -- which affected Texas in Februrary 2021 -- and Hurricane Ida -- which hit Louisiana, New Jersey, New York and several other states in August 2021 -- were both more disastrous than anticipated. In addition to claiming the lives of dozens of people and destroying many homes, these storms also crippled power grids across the South. When the power grids failed in Texas and Louisiana, production of raw materials needed to formulate plastics, paints and other elements involved in home construction and improvement was halted. This has resulted in both a price surge and a product shortage.
For example, in his September 2021 article “Paint is getting costlier and harder to find, and this could be just the beginning” for CNBC, Jeff Cox writes that “the deep freeze in the South slowed production of petroleum, a critical ingredient for paint.” Quoting Sherwin-Williams’ Julie Young, Cox notes that “‘these production disruptions, coupled with surging architectural and industrial demand, have pressured raw material supply and rapidly driven prices upward.’” It is important to keep in mind that shortages of building materials do not just affect excited first-time homebuyers or those renovating their houses for fun. At the same time extreme weather events driven by climate change affect the supply of building materials, they also delay rebuilding efforts necessitated by these devastating storms.
#7 COVID-19 Infections Continue to Shut Down Factories Across the Globe
Lastly, COVID-19 infections have fluctuated over the last year as new variants continue to emerge around the world. In her November 2021 article “Worsening shortages, high prices restrain U.S. manufacturing activity” for Reuters, Lucia Mutikani explains how new outbreaks have impacted building material costs. Mutikani writes that “supply constraints were worsened by a wave of coronavirus infections driven by the Delta variant over the summer, especially in Southeast Asia.” Because outbreaks continue to happen, “U.S. manufacturing activity slowed in October, with all industries reporting record-long lead times for raw materials, indicating that stretched supply chains continued to constrain economic activity early in the fourth quarter.” Writing for CNBC in her article “Lack of workers is further fueling supply chain woes,” Susan Caminiti notes that “an easing of the Delta variant will help the supply chain smooth out the flow of goods,” but echoes of these outbreaks could continue into next year.
Work With Reliable Design-Build Firm Element to Cut Confusion During the COVID-19 Pandemic
Shipping delays, labor shortages and halted production have all made the cost of building materials unpredictable. They have also contributed to a higher average cost of new homes in the United States. Working with a reliable, experienced design-build firm can help you build your new custom home without all the confusion caused by the COVID-19 pandemic. Though it is impossible to avoid shipping delays or cut costs entirely, the project management team at Element takes each challenge in stride. Together, our team members ensure each client has a seamless home building experience. To learn more about our unique approach to custom home building and all about our team, head over to our “How It Works” page.