Max Jarman
The Arizona Republic
Sept. 30, 2005

Massive rebuilding projects in the wake of the hurricanes are expected to create shortages of building materials and labor in Arizona that could result in higher-priced houses, construction delays and cost overruns on commercial projects.

As many as 275,000 homes were destroyed by hurricane Katrina alone, and rebuilding costs could top $300 billion. That will create an enormous demand for building materials and labor that could lead to supply constraints and price increases of 10 to 20 percent, local contractors said.

If home builders pass along their cost increases to consumers, it could throw a wrench in the Valley’s economic machine that depends on relatively affordable housing to attract new residents and fuel growth.

Builders already are seeing consumer resistance to new home prices that have increased an average $62,000, or 28 percent, so far this year. The median new home price in August was $235,716.

“Our success is due to the imbalance in housing prices with other desirable areas,” said RL Brown, whose firm, Home Builders Marketing, has tracked the Valley’s home-building industry for 24 years. “The closer our prices get to those other areas, the less incentive there is to move here,” he said.

Brown predicts there could be shortages of everything from lumber to kitchen appliances.

At the least, the increased costs and shortages could cut into the profits of Arizona home builders, which already are struggling with rising materials prices and supply problems. Most publicly held builders have seen the price of their stock drop at least 10 percent since the hurricanes.

Buddy Satterfield, president of Shea Homes Arizona, said the company is bracing for the impact of the storms and Gulf Coast rebuilding projects.

“My hope is that we won’t see shortages, but I believe we will see price increases,” he said.

Don Harrison, a spokesman for The Home Depot in Atlanta, said contractors in hot building markets such as Phoenix have been stocking up on materials in anticipation of shortages and price increases.

How much the price of building materials will increase is still an open question. Scott Peterson, president of Element Homes in Phoenix and chairman of the Home Builders Association of Central Arizona, is planning on at least 10 percent.

Jonathan Hay, an estimator for Wespac Construction’s residential division in Phoenix, believes the increases will be closer to 15 to 20 percent. He noted that plumbing bids already are coming in 9 percent higher than a month ago.

Prices for lumber, copper pipes, drywall and petroleum-based products such as PVC pipe and asphalt shingles already are rising.

The National Association of Home Builders reports that from Aug. 26 to Sept. 23, spot lumber prices rose more than 14 percent. Lumber futures on the Chicago Mercantile Exchange also have risen sharply since the hurricanes.

Portland Cement Association, which represents most of the nation’s concrete producers, is predicting record demand for cement as rebuilding begins. Arizona already has been experiencing spot shortages of cement, which has increased in price almost 13 percent in the past year.

The rebuilding that is scheduled to get into full swing early next year only will exacerbate the rising prices and shortages.

The magnitude of those shortages depends on how quickly the federal government, which has pledged to rebuild the hurricane-ravaged regions, proceeds. A slow rebuilding process would have less of an impact than a massive federally funded effort to get the job done as soon as possible.

Relaxing restrictions on imports such as lumber from Canada and cement from Mexico also could help. Eliminating an anti-dumping provision on Mexican cement could particularly help Arizona contractors.

“They could bring it across the border instead of halfway around the world,” said Ken Simonson, chief economist with the Associated General Contractors of America. The organization is lobbying to get the cement restriction dropped.

Jay Butler, who tracks Arizona’s real estate market for the Arizona Real Estate Center at Arizona State University, says large home builders such as Shea Homes could be less impacted.

“They buy materials in bulk and have more flexibility in absorbing costs,” he said.

Small residential builders, remodelers and commercial developers won’t be as lucky. Rising materials costs already are squeezing remodelers with fixed-bid projects, and commercial builders said bids are coming in higher than estimates.

Most developers are moving forward with their projects despite the higher costs, according to Arthur Gudith, also an estimator with Wespac.

Jay Dewitt, project director for the 1,000-room Sheraton Hotel the city is developing in downtown Phoenix, said bids for the project could come in higher than the $230 million estimate. But he added the city is developing contingency plans to address a possible cost increase.

Dawn Jones, a spokeswoman for Intel, said the company is closely watching building materials prices with respect to the $3 billion computer-chip plant it is building in Chandler.

“At this time there is no impact to our construction schedule, but we will continue to monitor the situation,” she said.

Shea Homes’ Satterfield said the company would try to pass on the higher construction costs to consumers in the form of higher home prices. But he noted that might not be possible in some areas where customers already are balking at the prices.

“We could scale back in some areas or just eat the difference,” he said.