It’s no secret that the construction industry boomed during the pandemic. Unfortunately, the popularity came at a price for the construction sector and consumers. Inflation has put a damper on construction, leading to higher costs for construction companies. Consumers, contractors, and companies are wondering if these costs will decrease in 2022. We will provide some background and analysis to reveal how we got here and where prices can be heading in the future.
A Surge in U.S. Construction Costs Over the Years
Construction costs tend to rise in a growing economy. These costs jumped 19.6% year-over-year between 2020 and 2021. This growth represents the largest increase in construction costs since 1970, forcing construction companies to raise prices to maintain their profit margins. Construction costs rose modestly in the prior year, clocking in at 4.4% year-over-year growth.
What Is Causing the Rise in Construction Costs?
Construction costs have increased significantly since the pandemic and challenging profit margins. As a result, some contractors have used alternative financing to obtain more expensive materials and other resources so they aren’t limited by cash flow. The costs of goods change for various reasons, but two key events have driven recent price increases.
COVID-19 Pandemic
The COVID-19 pandemic disrupted many parts of our lives. The pandemic made people more conscious about their health and money, and it significantly impacted the supply chain. Lockdown measures reduced available workers and stopped the flow of goods. Manufacturers had less incentive to continue producing the same quantity of materials, creating a supply-side issue. Supply issues were not adequately resolved to deal with a surge in demand the following year. Companies raised their prices on materials in response to supply and demand dynamics to avoid running out of materials too soon. However, high demand wasn’t the only reason companies raised their prices. Materials stayed in docks longer, resulting in higher expenses for manufacturers that they passed onto contractors.
Russia-Ukraine Crisis
The Russia-Ukraine crisis has displaced millions of Ukrainians. Their country has experienced the brunt of economic pain, but the global connectedness of the world has ripple effects. The conflict has exasperated supply chain issues and made accessing materials more difficult. More supply chain interruptions slowed down deliveries, and a decreased gas supply hurt a market reeling from higher gas prices. The ongoing war in Ukraine and economic sanctions against Russia continue to hurt the global economy and increase the cost of materials.
Will Construction Costs Go Down in 2022? What the Experts are Predicting
When costs rise dramatically, some people wonder when expenses will stop going up. Some people buy more materials on any dip, fearing prices will quickly return to their all-time highs. Experts have cited several headwinds such as rising interest rates and declining demand for residential construction that can lower overall construction prices in 2022.
Interactive Brokers’ senior economist Jose Torres predicts housing prices will decrease by 25%, beginning in early 2023. Ian Shepherdson, the Pantheon Macro chief economist, predicted that home construction would continue to slow down because mortgage applications collapsed by over 25% this year. Shepherdson believes the housing construction can still fall, citing more private sellers entering the market and fewer buyers scooping up homes as mortgage rates continue to increase. Both predictions hint at a perfect storm that reduces the prices of goods.
Less demand for the new home construction projects will ripple to the supply chain. Contractors will buy fewer goods because they serve fewer buyers. Manufacturers will have to respond to this new dynamic by lowering prices and helping construction companies with profit margins. Prices will move differently across markets. Here’s what to focus on:
Construction Material Inputs
Each construction product requires several building materials. While these resources have increased in price, the good news is that many of them face headwinds. This can translate into lower prices in the future. We have outlined price movements for some of the most popular commercial construction materials.
- Steel: Steel rose substantially in 2021 (74.4% year-over-year growth), but it started to decline early in 2022, posting a 9.9% decrease in February.
- Copper: This material has appreciated over the past year, but a 12.8% year-over-year decline in copper’s price on the LME exchange suggests challenges ahead.
- Concrete, Cement, and Bricks: These materials’ prices have increased so far in 2022. These materials did not appreciate as much as others, giving them more room to get initial gains in 2022. The current market dynamics can interrupt this trend.
- Paint and Coatings: Paints and coatings continued appreciating in 2022, with most types rising between 20%-30% from 2021 to 2022. This growth took place before interest rate hikes and other recent economic events.
- Electrical Products: Similar to other materials, electrical products appreciated in 2021 but will face headwinds in the second half of 2022.
- Other Energy-intensive Products: Most energy-intensive products have increased year-over-year but face an uphill battle with the current economic outlook.
Energy Prices
Energy prices soared 30.8% year-over-year because of inflation and supply chain issues. Higher interest rates can threaten this demand, but unresolved supply chain issues can keep these prices up.
Labor
The construction industry is in a labor shortage and needs over 2 million workers to fill the gap in the next three years. Finding skilled workers who speed up a project will cost extra money. Labor costs can increase in the future as shortages continue and more people leave the labor force. Over 5 million workers over 55 years old left the construction industry in 2020.
Supply Chain
Supply chain issues remain a problem with no immediate signs of recovery. The ongoing conflict in Ukraine and labor shortages can dampen the effects of reduced demand. Ordering materials early is more critical than ever, so you don’t have to wait longer for everything to arrive.
Interest Rates
The Federal Reserve is aggressively raising interest rates to combat inflation. The higher interest rates will continue hurting consumer demand and reduce the number of home buyers. Higher rates will hurt the construction industry but also reduce the costs of materials. The Fed has several interest rate hikes planned for 2022.
Inflation
Inflation is still at its highest level in over 40 years, dialing in at a 9.1% year-over-year growth in the consumer price index. Unchecked inflationary pressure will continue to increase construction costs. However, a rising interest rate and decreasing demand can slow down inflation in the coming years. Inflation has continued to be red-hot despite the Fed’s recent rate hikes, which could prompt higher interest rate hikes in the future.
Construction Loans
Construction loan interest rates will increase as the Fed raises rates. Higher interest rates will decrease demand for these loans because of the higher monthly payments.
How to Get Construction Funding Going Forward
Any project delay can slow down your business and force you to reject clients because of a backlog. Getting construction funding can help you complete projects sooner so you can avoid that scenario. Adequate capital lets you purchase enough materials for each project instead of falling short.
