While the recent inflation numbers released from the Bureau of Labor Statistics have been interpreted, by some, as being relatively tame, many economists and analysts are pointing to the gathering threat of rising global commodity prices, and the effects they will have upon the fragile newfound-stability in the U.S. housing market, particularly when it comes to the price of new homes. The four-year trend of dropping housing prices for new construction may soon be coming to an end, as builders are forced to pass along skyrocketing material costs into a real estate market still reeling from high unemployment and tight financing conditions.
The implication of higher commodity prices for home builders is apparent, as this inflation represents a rise in the total cost of the materials (and energy) which are required to construct new homes. Gas, wood, copper, and even primary ingredients for house paint have all seen spikes in price since January of 2010, as resurgent economies in countries such as India and Brazil (as well as in the consumer-powerhouse of China), put pressure on global supplies.
The inflation represents an unhappy scenario for U.S. home builders, who for the past four years have continued to cut prices in order to meet sluggish consumer demand. They now face the daunting choice of either absorbing even more expense in the way of materials outlay, or translating the rising materials costs into higher selling-prices on new homes. The choice is a difficult one, as stubbornly-high unemployment figures continue to affect the general economy and weaken customer demand, creating an economic climate that is unsuited for any potential rise in home sales prices.
However, builders may have no option in the matter, as their historically-low profit margins (down almost 30% over the past nine years) may not offer much room for consideration. The data seem to suggest that a rise in prices for new homes is inevitable, as builders will need to pass on commodity costs to their consumers in order to stay afloat in a difficult economic environment. As Bernard Markstein, vice-president of analysis and forecasting at the National Association of Home Builders was quoted as saying in a recent Los Angeles Times piece: “Builders are resisting raising their prices, but ultimately they’re going to have to… If you want to buy a new house and are in a position to do so, you should do it now.”
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