Understanding the High Cost of Construction Materials
From the gas pump to the grocery store and everywhere in between, we have all seen the effects of inflation. Increased housing costs are also the result of inflation.
According to data from the U.S. Bureau of Labor Statistics, cost for construction materials jumped from as low as 10 percent for concrete to over 50 percent for structural metal from January 2021 to January 2022.
These factors influence the rate at which new homes are built, the costs that owners face when scheduling repairs and the rates all parties pay for insurance. Consider the following.
Inflation and the Cost of Construction Materials
The National Association of Home Builders (NAHB) has tracked the cost of building materials throughout the COVID-19 pandemic, using data from the Bureau of Labor Statistics’ Producer Price Index (PPI) report.
In April 2022, the PPI indicated a 1.4-percent increase from March 2022 and a 4.1-percent increase from January 2022. Going back a year, overall costs related to building materials went up over 20 percent. From the start of the pandemic, material costs have increased by one-third, including a 17.5-percent jump from 2020 to 2021 – the largest on record since 1970.
Materials are only one component of the construction industry. BLS data further indicates that costs related to services – transportation, storage and labor – have increased over 15 percent from the start of 2022 and over 18 percent during the previous year.
Similar to costs for materials, service prices also went up nearly 40 percent from the start of the pandemic to mid-2022. Although inflation and a fluctuating labor market appear to be the source, other factors come into play, including:
- Where construction materials are manufactured: Wood, steel, concrete and other materials are often manufactured overseas and shipped to the United States.
- Competition: While the U.S. manufactures less building materials, the existing supply faces competition from both developed and developing nations.
- Shipping: Since these materials are traveling a greater distance, price encompasses shipping and warehousing costs.
Effects of Higher Construction Material Costs
We’re seeing the effects of increasing building material costs in real time:
- Constructing a new building costs more: Compared to a year ago, the BLS outlines this increase as 12 percent more for a school to 28 percent more for a warehouse.
- Fewer affordable housing options: Costs associated with the materials themselves, plus shipping and labor, contribute to limited affordable housing options. This scenario creates multiple hoops and fewer options for first-time buyers, prices out consumers who would have been able to afford homeownership a couple of decades ago and increases monthly rent costs for everyone else.
- Inaccurate appraisals: A realtor may quote you one price, but an appraiser looks at the current costs associated with the materials and quotes you a higher amount. This disparity can mean that new construction has fewer features to keep costs down or that new homeowners eventually get stuck with an underwater mortgage.
- Commercial business challenges: Along with reducing housing stock, higher prices on building materials means property owners have to pay more to purchase or rent a space. This factor, plus higher insurance premiums, eats into profits. As a result, businesses face a tough choice: limit staff or increase prices on services.
- Construction delays: Coupled with supply chain issues, higher material costs mean that construction projects get drawn out. Projects may also be abandoned due to these elevated rates and difficulty sourcing materials like steel and concrete.
Considering these developments, it’s advised to have the current value of your home or commercial property reassessed and use these figures to update your insurance. While this can translate to higher premiums, sticking with a lower rate could mean your carrier won’t cover all replacement costs, should your property experience damage. You’ll either need to pay for the rest out-of-pocket or permanently shut down operations.
To adjust your policy in response to rising construction material costs, reach out to your agent at HUB/Ion Insurance. To get started, contact us today.