The Expert Podcast

So is it materials, is it labor, is it supply chain — what is the factor that's creating house price increases or even new home construction being deficient? Well, the answer is all of the above. There is certainly inflation in materials that go into new construction, whether it's lumber or roofing. In this article, we'll talk about cement and why that's a pretty significant factor in the construction industry. But what's behind the inflation? Is it supply chain? Is it labor? Well again, the answer is yes to all of the above.

In one example that can be also extrapolated onto other types of materials, the cement industry is having a triple whammy perfect storm, according to this article, that's creating higher prices. One is the demand for construction, meaning that the number of new projects big and small that are out there are creating orders for cement. Every project needs some cement product at some point. New home construction — you have foundation, you have footings, even a driveway or sidewalk at the very least. Some have much more than that.

If it's a commercial project, you have even more footings, you may even have the building structure be poured concrete. You have municipal projects — roads, bridges — all of those are increasing in volume and in the number of projects. Much of this had to do with during the pandemic, a lot of these projects were put on hold or slowed down. Even if they weren't, many potential construction projects were halted because there was a concern that maybe they're not needed. At the beginning of the pandemic, it wasn't sure whether or not the economy was going to shut down altogether and there wouldn't be a demand for retail, consumer products, or commercial properties. So a lot of builders and contractors pulled back and they stopped these projects. A lot of municipal governments stopped projects. So these projects were slowed down from let's say beginning of 2020 until maybe mid-2021 — a year and a half, 18 months. That created an artificial reduction in the number and volume of projects needing cement and other materials too, but let's just talk about cement.

Concrete really — cement is one component of concrete — and the providers of concrete also did some reduction in staffing. Many of the concrete yards shut down or laid off staff or maybe planned for a future with a lower throughput volume. What that did was put many of those people who used to work in the concrete plants to look for other jobs, maybe get out of the industry, maybe retire. So now fast forward to the beginning of 2022, end of 2021, beginning of 2022 — now these projects are starting to ramp back up. It's obvious that there's a demand for construction.

New homes, commercial, all of the municipal government projects that were put on hold are now back in the marketplace. Well, these contractors and builders now look to the concrete plants to deliver them concrete. Because the labor is not available to run the plants or produce at high enough volume, their throughput — their capability — is lower. At the same time, there's also an availability issue of the Portland cement, which is the glue that holds together concrete.

And some of the other raw materials — the sand, the aggregate — so the combination of the supply chain for the raw materials, the labor deficiency, now these concrete plants can't churn out enough to meet the orders. So what do they do? Prices go up. The builders and the users of the materials either have to pay more, use less, or both, which creates more of a backlog and it creates more of a pent-up demand. Even though now the demand is back, it's still not able to be caught up for what's called overhang.

Projects that need to get done still can't be proceeded at the fastest pace. And here's part of the answer: labor. That's what's caused most of the shortage. Nobody knew how to navigate it, right? It was a new era. Nobody knew how to navigate shutdowns. Now, the businesses are only able to take on 60 percent of what they can normally handle because labor and supply are both not at their highest capability at the same time — 60 percent of its normal volume. The normal volume is being exceeded.

Meaning that the demand is even higher than what it normally had been prior to the pandemic. Demand for construction has exploded. There's a dire need of truck drivers as an example. Even if you can make the cement, you have to deliver it. Not every high school kid can hop in a cement truck and drive it down the road. There are special permits, CDLs, and experience of running the rig. So there's many factors that are going into what seems like a simple answer — just make more cement, make more concrete. The problem is, it's not that easy.

There are many links in the chain of making concrete. You need the cement, you need the aggregate, the sand, the labor, the drivers, and materials. Any one of those links in the chain that's deficient is gonna put a monkey wrench in all the gears. It's going to keep the volume lower than what it would normally be. When that happens, prices will go up on what cement does come out and what concrete does come out, and the users — the end users — are going to make decisions. We worked with a project in our building division.

A couple months ago where it didn't need that much — probably four or five yards of concrete for some piers — and between the price of the concrete and the price of the pumping service being more than what it was, this was a job that overall probably cost eight to nine thousand dollars total between the concrete and the other materials for the job. The concrete itself was now up to maybe four thousand dollars with the labor, shipping, materials, and finishing. So the job now is put on hold.

The concrete that comes out of the plant is still going to be used by somebody. That job is still there waiting to get done. At some point, it will get done. So this backlog is still piling up. It's not reducing the backlog, it's still piling up in the midst of prices going up. The reason for being aware of that is one of the big questions in the economy has to do with what's going to happen to inflation in the future. Look, if this is a matter of just getting caught up after the pandemic and then the inflation will go away, that'd be one thing.

But in all areas of major consumption, even with the volume of materials being available, goods being available, there still is a backlog of vehicles, chips, construction equipment, lumber, consumer goods, homes. The backlog is getting bigger, not smaller. So what that means is, if you think the inflation rate is bad now, wait till you see the next year or two when the backlog is going to be bigger than what it is. And it doesn't seem like there's any increase in capacity happening anytime soon.

The labor market is not getting any better. All the people who are working are working. All of the available capacity of plants is pretty much as much as it can handle based on materials, labor, and all the other factors. So if volume is going to be the same or maybe greater demand in 2023 or 2024 and the available capacity to produce is not going to be any greater — look, that cement plant in the article, they're not going to magically be able to do much more than 60 percent anytime soon. The labor's not going to materialize, the truck drivers are not going to materialize, the Portland cement raw material is not going to be magically available in more capacities — maybe a little bit more, but not that much more to affect a balance of supply and demand.

For new home construction, what does it mean? The cost per square foot is going to continue to rise. That means the new price home strike price is going to be also higher. You've seen builders who have canceled contracts on homes that they had with a buyer for eight or nine months waiting for their house to be built, and then two weeks before the closing, the contract is canceled. The builder now sells it at a higher price. Part of it's greed, part of it's that it just costs more money to build that house.

So if you look at the numbers and the facts behind why inflation is happening, it proves you can't just wait around waiting for inflation and prices to go down. The forces in the market that are creating higher price points are still there and even the projected future shows they're going to be there for a while. So in planning anything with regard to business operations, pricing, profit margins, end user pricing, and as a consumer what you're going to expect for your cost, it may be valuable to just plan for between seven and nine percent inflation year over year for most goods. Maybe some goods a little bit higher — vehicles, real estate, higher end goods — and adjust accordingly. Maybe it moves up your purchase sooner, maybe it creates an adjustment to what your project is in the first place. You.