Make no mistake; the shockwave effects of Katrina will make an impact on the nation's real estate industry. Increased fuel supplies have already begun to increase the cost of running construction equipment. However hardest hit will be new housing construction where the shortage of key construction materials rerouted to the Southeast (lumber, drywall, concrete, etc.) will not only increase material costs but may also cause construction delays as builders wait on materials. Hardest hit will be the small builders and neighborhood rehabbers who don’t have the ability to lock in long term supply contracts.

News sources from all over the country- from Pennsylvania to Arizona, from Baltimore even all the way to Hawaii- are warning of the impact Katrina will have on the local construction trade.

Although Hurricane’s have historically caused short term price increases of construction materials (as demand outstrips supply), Katrina packed a double punch by not only damaging and destroying a lot of wood-built structures across the whole of the southeast, but the flooding in New Orleans, a major U.S. city, will cause immediate demand for building materials as homeowners replace flooded out drywall, plywood flooring, even carpeting to homes that otherwise weren’t damaged by the hurricane (or totally destroyed by the flooding). Combine this with the damage done to U.S. oil production as well as the Mississippi lumber industry, and picture begins to look bleak.

So what does this mean to the St. Louis real estate industry?

As a home buyer looking to buy a new construction home, expect those home prices to slowly start inching higher as builders start to estimate for higher construction costs. If you’ve been thinking about making a purchase, you might want to evaluate locking into a price now before builders start to get a grasp of their true costs. How high new home prices will climb will ultimately be determined by several factors:

- Where fuel prices ultimately settle. Although important, the cost of running a bulldozer today or tomorrow is less important to the overall cost of building a home than the long term increase we are apt to see in construction materials caused by increased shipping costs.
- If demand for building materials cause shortages. The profitability for a home builder can be quickly drained by construction delays. A shortage of key supplies, such as drywall, plywood, or 2x4’s, can cause a ripple effect with subcontractors- turning a two week delay into several months. More important, a delay of even a few weeks can cause a builder to loose thousands of dollars in financing and labor costs- costs that ultimately have to be passed on to future home buyers.
- What impact, if any, Katrina has on the local labor pool. Some experts are already predicting that the pending construction boom to rebuild cities like New Orleans and Gulfport will entice skilled construction laborers from around the country to relocate to the Southeast in search of higher wages. It is unknown if it will ultimately cause a shortage of skilled labor in markets like St. Louis, or force employers to pay higher wages to keep their people.
- Interest Rates are the other factor. A decline in interest rates, which has been predicted by some, could always offset some of these other costs for a builder. Increase in rates could only exacerbate the situation.

Looking Forward…

If you have a new construction home already under contract that is less than ½ finished, forget what your builder has previously told you and expect delays. It’s inevitable. If a builder can’t get access to building materials, then they can’t keep a home on schedule- and all signs point to eventual material shortages over the upcoming months.

How this will ultimately affect existing home sales remains to be seen. Long term building supply shortages could create a temporary shortage of new construction homes, forcing more buyers into existing homes (increasing existing home prices). However higher construction costs could also damper the rehab business- making it harder to sell some existing homes and driving some first time buyers, who tend to want updated or new homes, out of the market.

The impact higher fuel prices will have on the economy also remains to be seen. Could we see a slowdown of people upgrading homes? Will people want to be closer to work- slowing down sales on the edge of town and increasing sales closer in? Will higher heating fuel costs cause consumers to seek out energy saving devices that change the way we build homes- such as implementing solar or other technologies?

Worst Case Scenarios…

Although not likely, a sudden spike in material prices combined with long term shortages could push some builders with lots of pre-sold homes into bankruptcy as profit margins erode away. The industry’s worst enemy, however, would have to be long-term price/supply uncertainty. Uncertainty is what keeps the smaller builders and rehabbers on the sidelines. Not being able to accurately project costs also tends to force larger builders to be conservative and take on fewer projects. A local decline in housing starts by just 5% could be detrimental to a local economy- regardless of what is happening on a national scale. A building boom in the Southeast doesn't translate into a booming economy everywhere else.

Again, these are the doom and gloom projections that we don’t need to worry about just yet. However it’s going to be interesting to see just what happens to prices and availability down at the local Home Depot and Lowe’s.

Referenced to write this article:
http://realtytimes.com/rtcpages/20050909_rates.htm
http://www.thehawaiichannel.com/news/4942515/detail.html
http://www.eastvalleytribune.com/index.php?sty=47773
http://www.wnep.com/Global/story.asp?S=3779764