Construction materials costs still declining

The price index for materials used in nonresidential construction inched up 0.2% in December after declining for three months, but remains 3% below the peak index value last July.

Pricing trends will remain favorable to buyers at least through winter until the 2006 buildup of excess inventory is substantially reduced and homebuilders stop cutting their materials purchases—at that point, materials price inflation will resume but at a much slower rate. Reed Construction Data expects materials price inflation in the 5-7% range in the second half of this year and through 2008.

The price declines from July to December 2006 resulted from three developments that are now largely exhausted and not likely to be repeated. First, the plunge in new home construction caused price drops for lumber, plywood, and gypsum. Second, some slowing in the still strong world economy weakened prices of internationally traded commodities, such as nonferrous pipe and structural steel. Third, speculators bailed out of the oil market to avoid capital losses, dropping crude oil prices.