From lumber to labor, shortages keep a lid on housing activity

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Posted: Thursday, April 25, 2013 12:00 am

Just as area builders were rejoicing at the swell in residential construction, rising costs of lumber, labor and other key ingredients threaten to jam up activity.

Escalating material costs are squeezing builder profit margins, reports the National Association of Homebuilders, and in some instances preventing them from meeting demand for new homes.

“It is worrisome,” said Jerry Standerford, president of the Metro Omaha Builders Association. “You're starting to see shortages, which could delay construction in some cases.”

Standerford, also of Sherwood Homes and Lane Building Corp., said he hadn't seen prices like today's since 2005, when the construction frenzy was at its peak.

Increases vary depending on the material, but the NAHB said prices of oriented strand board (an engineered wood product) have doubled since April last year, and framing lumber prices have gone up by 40 percent in the past six months. Look up property valuations in Douglas and Sarpy Counties, and find real estate sales reports and neighborhood census data.

“Framing is a bigger component share,” said NAHB's Stephen Melman. “That's why when that goes up, it really hits a raw nerve.”

Joel Russell, vice president and director of residential sales at Millard Lumber, said the basket of goods it supplies to builders for a new 2,200-square-foot, two-story house has risen about 15 percent in the past year. Those goods include framing materials along with hardboard siding, laminated roofing, vinyl casement windows, interior oak trim, doors and hardware.

The good news, say local builders and suppliers, is that the uptick in costs is associated with the uptick in demand. Until the recent homebuilding recovery, demand for new single-family houses in the Omaha metro area had been on a six-year decline.

“Ultimately it is a positive story,” Russell said. “It just makes it challenging to manage in the short term.”

Further driving up homebuilding costs, industry leaders say, is a thinned-out skilled labor force trying to regain numerical strength. The Great Recession forced many construction workers and truckers to leave their jobs for more secure paychecks. Those subcontractors still in business now are able to pick and choose jobs, whereas past bidding wars tended to keep labor prices lower.

“Things could be recovering more quickly, but we don't have the people qualified to do the work,” Russell said. “The people who have survived to this point are getting increased pricing because demand is there.”

Melman, NAHB's director of economic services, said it will take time to reconstruct saw mills and lumber plants dismantled during the downturn.

“You just can't just flip a switch,” Melman said. “You need money to invest, labor, a transportation network — all that has to get going again.”

Global demand for lumber also is outstripping U.S. supply, and the national association has urged Congress to pass legislation that, in part, would increase timber production on federal lands.

Yet another factor contributing to a drop in builder confidence across the country is concern over too few developed housing lots to build on.

“Many builders are expressing frustration over being unable to respond to the rising demand for new homes due to difficulties in obtaining construction credit, overly restrictive mortgage lending rules and construction costs that are increasing at a faster pace than appraised values,” association chairman Rick Judson said.

While rising costs can discourage sales, Melman predicts that many homebuyers will cut back on certain features or size rather than scuttle plans to build.

He said: “What if mortgage rates go up? If you wait a year, prices may go up because of other factors.”

At builder supply companies, managers are spending more time discussing budgets with customers. Price volatility of materials, especially lumber and engineered wood products, can throw off a builder's financial projections and lead to a loss.

“We're proactive in trying to keep them informed of what's coming down the pike,” said Tom Christensen of Christensen Lumber in Fremont, Neb.

He said he has no crystal ball but expects prices to firm up and then cool down as production is ramped up.

Millard Lumber produces a monthly price index to guide customers.

Building materials are not the only factor in the price a homebuyer pays. Although the basket of goods that Millard supplies to a homebuilder has gone up about 15 percent in a year, Russell estimates that the overall total cost of a new house has gone up by 5 percent.

Standerford estimates that the overall cost to build a house in the Omaha area could rise an additional 5 percent to 10 percent in the next year.

For now, Standerford said, MOBA builder members are not reporting a slowdown in sales.

The number of single-family residential building permits issued in the Omaha area the first three months of this year climbed 36 percent over last year, according to the Greater Omaha Chamber of Commerce.

Standerford suspects the potential of more price increases, or rising interest rates, might push more people into building sooner rather than later.

“We're optimistic about a good market,” he said. “We're also cautious about what the rising costs will bring.”

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