Hurricanes Katrina and Rita will mean increased costs of building in the future, but not immediately

The natural disasters of Hurricanes Katrina and Rita have left upwards of 200,000 homes either destroyed or uninhabitable and needing rebuilding. This country has never seen a disaster on this scale, so the impacts are hard to estimate. The National Association of Home Builders released a report on September 2, 2005 (see http://www.nahb.org/news_details.aspx?sectionID=148&newsID=1572 for the full report) providing historical price increases for building materials after recent major hurricanes. The price increase ranged from 16% to 45%, implying that increases in building supplies are almost certain to occur again.

Spot prices in lumber jumped over 10% in the days following Hurricane Katrina as the markets realized the widespread swath of destruction that the weather created. While this was certainly in anticipation of increased demand, the real demand trigger is many months away. Until areas are cleaned up and made inhabitable again, rebuilding cannot and will not occur. Therefore, do not expect shortages in lumber, plywood, and drywall until spring 2006 at the earliest.

Three factors will impact future demand of basic building materials:

* The speed of the insurance industrys and governmental responses. While up to $100 billion in uninsured losses may occur (http://www.foxnews.com/story/0,2933,170874,00.html) and at least $20 billion in insured losses may occur (http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/09-02-2005/0004099642&EDATE=), homeowners are unlikely to receive compensation until adjusters can make their way to affected areas. Additionally, the government will likely step in to ameliorate the uninsured losses to some extent, but such action will take time to work its way to the affected.

* The rate of permanent displacement. If displaced citizens decide to permanently relocate to areas such as Baton Route and Houston, those areas will need to increase housing supply to meet the new, unexpected demand. This will create surges in need for building supplies.

* Speculation in affected areas, particularly New Orleans. The displaced may decide to sell their properties for reduced prices, potentially fueling speculation. As real estate investors look to turn a profit from their purchases, they will need to either rehabilitate or rebuild on the properties, creating new demand for supplies.

Another factor to consider is mortgage rates. The Federal Reserve Bank had been on a trajectory to increase rates before Katrina, and while the damage was widespread, it was a relatively small amount compared to national GDP. While the Fed may temporarily halt the increase in rates, such a slowdown is unlikely to be long-term as long as the economy continues its growth. This will mean, in relative terms, that the cost of building with borrowed money, will increase in the future, regardless of demand for building materials. Therefore, the two factors may combine to compound price increases.

What this means for you

If you are considering building a house in the next three years, you may want to consider starting the process now. Even if you do not plan to actually start in the near future, builders can order future delivery of supplies now. By buying now, builders can lock in current prices and hedge the risk of future increases. Plus, future purchases increase the likelihood of delivery, as supplies will be allocated to the previously made purchase. In past natural disasters, shortages of building supplies were widespread. Six months after [Hurricane] Ivan, it was really difficult to get drywall and lumber, says Tony Glanville, director of construction services at Bridlewood, a Virginia home builder. By locking in contracts now, you can reduce the chances of facing supply shortages and price increases in the future.

Visit http://www.bridlewoodproperties.com for more information.

2005 Jason Hull