Inflationary Pressure Increases as Economy Picks Up Speed

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

The rising costs of building materials are top of mind for most builders and other stakeholders throughout the industry. Lumber prices are up approximately 200% from a year ago, adding about $24,000 to the price of a new single-family home and $9,000 to a new apartment.

And as buyer traffic remains strong, additional costs and delays for other building materials are further challenging the sector, including appraisals. On an aggregate basis, residential construction costs are up almost 10% over the last year — rising five times faster than the recent measures of inflation.

However, as these supply-chain issues affect other parts of the economy, which progressively continues to reopen, the pace of economic growth will increase inflationary pressure. The Consumer Price Index, a broad inflation proxy, increased at a 2.6% rate over the last year.

And more is coming in 2021. The economic policy question is whether an uptick in inflationary costs will be temporary or permanent. The Federal Reserve believes these forces will be temporary, and that as supply-chains unwind, inflationary forces will be dampened.

This would be the favorable outcome for the building industry because it would mean the Fed could continue its “lower for longer” policy of accommodative strategy for monetary policy and interest rates. Doing so would help further heal the labor market, and provide additional support for multifamily and single-family housing demand.