I always enjoy reading Lawrence Yun’s columns from Realtor magazine. He is the chief economist for NAR (National Association Realtors) and has an above average record in advice and market predictions. His latest column is about hedging inflation by simply owning a home. It’s no mystery unless you have been asleep for the last three years that the housing situation in this country is in peril.
Yun makes an interesting comment stating previously built homes (three year old commodity materials) and market pricing for commodities will eventually force home pricing upward. This concept hits close to home for myself being in the real estate development and construction trade. The producer price index for construction is up 39% in the last five years with virtually no end in site. Steel, concrete, and energy (especially oil derived products) continue to soar. Once the glut of housing inventory clears and the financial markets stabilize pricing has no place to go but up. A home five years ago was roughly $130 a square foot for standard specification construction and now hovers around $170 a square foot for the same house (in New England anyway). Why the difference? It’s simply the cost of construction (the bundled commodities that go into the construction of a home).
Currently new construction pricing is at a premium to existing home pricing because of material prices. As we move forward this will only inevitably take the existing home sale price upward. So, the next time you’re thinking about buying long on steel, gold or copper you might just want to look at the four walls that surround you.
Let me know your thoughts on the correlation.