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alstry (< 20)

Rising Oil Prices Hitting Home Builders



June 14, 2008 – Comments (4)

Rising oil prices could be very material regarding materials and HB profits in the upcoming quarter. 

We know home prices have been crashing over the past 6 months.  We know HBs have been liquidating communities at 40-50% off.  We know sales pace has been slowing and backlog is way down.  Yes we know how tough it is out there competing with rising inventory of foreclosures.

But what is really amazing is the rise in prices of building material costs over the past six months.  Shingles are going through the attempt at a joke but it is really the truth.  Transportation costs delivering concrete soaring.  Pretty much most components of building a house has gone up materially over the past six months.

You havn't heard much about this on the CCs yet nor from other better informed CAPS members.  But it clearly could be something worth keeping an eye on....especially as costs for some materials have doubled.

With airlines, they can cut out planes and double fares.  Unfortunately for HBs, there is so much foreclosure inventory coming to market in the areas where they build, there is little they can do to create pricing power.  As a matter of fact pricing is going the wrong way.....DOWN.

No pricing power and rising will be interesting to see if analysts raise this issue on the CC.

The above is teetering on the foundation that interest rates are rising while unemployment  issues  loom and consumer confidence is failing.

Sure, let's invest $600 million for a fraction of SPF when we could buy the whole company for less than half the price.....what the heck is going on there?



4 Comments – Post Your Own

#1) On June 14, 2008 at 11:03 PM, alstry (< 20) wrote:


The way Crosswinds Communities president Bernie Glieberman sees it, there are a multitude of threats that a face a builder today.

If you are not an infill site, you've got one strike against you. And $4 per gallon for gas is the latest factor driving lack of demand.

Compounding that, there's the foreclosure issue. Glieberman has tried to combat it by bidding up and, in some cases, actually buying back foreclosed homes in his Detroit market communities to keep them from hitting the market at a lower, bank-owned price.

It's a creative tactic, to be sure. But at some point, it's one that becomes impossible to maintain. "I have 250 houses built right now [in the Country Walk community], and my God, I have a situation where there are 10 houses for sale by the banks. I can't do anything with 10 houses," said Glieberman.

As a result, prices have fallen so low that Crosswinds can't build houses and make money. So despite the fact that there are still another 160 lots in the community, he had to stop selling. "Based on our lot releases, we couldn't break even," Glieberman explained

This is what I have been warning about.  Due to increased downward pressure from foreclosures, pricing has become so low that builders cannot afford to build.

You can listen to the bellacosious chimps or you can be right there on the front lines of reality.

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#2) On June 14, 2008 at 11:21 PM, MarketBottom (28.50) wrote:

I work for a small North Florida Builder, in 2006 we built and closed 95 homes. In 2007 we built 0 new homes, finished 7 under construction rented 2 and sold 5. In 2008 we have built 7, sold 4. Roofing and other building material are petroleum based and most production of building materials requires large amounts of heat and electricity. Prices of building materials always rise when demand is truly terrible.

From personal experience, I can say it became truly sad and frightening to see a young couple move into a 250,000 dollar house with an expired license plate on their car.

I do not blame people for wanting a home, I do blame those that led the sheep to slaughter.


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#3) On June 15, 2008 at 5:01 AM, alstry (< 20) wrote:

There is a lot of blame to throw around.

With oil prices rising, costs to construct a home are getting out of control.  Bulls will say that is a good thing and bodes well for the future.....except for a couple things:

a.  Oil effects the price of just about everything leaving less dollars for the consumer to pay the mortgage

b. Foreclosure inventory is now really beginning to dictate pricing in many areas and distressed inventory has little regard for construction costs.

Between rising oil prices, rising food prices, and rising interest rates....more and more consumers barely have anything left to make mortgage or rent payments....before factoring stagnant or declining jobs.

This is not an America alone is an issue being felt around the world.  Truckers and Taxi drivers are protesting in Europe.  People are rioting about food prices around.

Factoring a constrained ability for banks to lend and rising oil prices effectively shutting down transportation and driving explosive inflation....we potentially face one of the darkest economic periods in a long time.

Think of the irony, the banks free lending practices drove up demand and perceived prosperity so high so quickly that now few can afford the new prices.......and the banks can't lend freely anymore as prices are likely to remain high for a while.

No money, lots of debt, and high prices....where do you think this is going?

It will be interesting to see how many homes must get foreclosed and business shut down before we as a nation stand up and start trying to address the problem...otherwise the problem will inevitably address us.

Are we entering an inflationary depression where at the end of the day most can't afford much?  Costs going up and wages going down is never a good combination.

When I started this nonsense, I thought the credit/debt crisis would ostensibly bring America to its knees.....and now add in the oil shock and inflationary pressures on the other side and being on our knees may be as tall as we get for a while.

I wish I could put forth an optimistic scenario....right now I have none.

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#4) On June 16, 2008 at 11:46 AM, bobbyj0708 (< 20) wrote:

I handled a lot of SFH purchasing until late last year and still keep an eye on pricing. All petroleum based products are up in the last 6 months as you might expect as well as copper and steel. What I really found interesting is that  the lumber suppliers have managed to get lumber prices higher as well. The only thing not increasing is labor.

 Everything is going against the builders these days. Despite the optimistic yammering of a certain someone, I think they are D-O-N-E...

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