Cost of New Construction and Renovations on the Rise
We are in unusual times. Normally when prices are on the rise, it’s due to a period of inflation. But now inflation is at historic lows, yet we are experiencing increasing prices. According to economists, the two factors causing this are the enhanced tariffs on Chinese imports and the rising cost of labor. Particularly hard hit will be home construction and renovation industries.
Tariffs
On May 10th, tariffs rose from 10-25% on about 200 billion of Chinese goods, including about 450 standard items that are often used in home building and renovations. These include counter tops, lighting fixtures, finishings, kitchen cabinets, circular saw blades, nails and screws, concrete, tiles, among many other items. The additional tariff costs rose from 1 billion to 2.5 billion on a national scale according to The National Association of Home Builders (NAHB).
Importers pass on these increased costs to their distributors, who in turn pass it on to the retailers, who then raise their prices to the end user – the consumer.
In an interview with CNBC, Bruce Case, CEO of Case Architects and Associates in Washington DC expects some clients to reduce the scope of their planned home renovations. “It’s probably about a 7-8% increase to the consumer, and I would love to be able to eat that, but at this point I don’t see a way to engineer around that …” Case says that he doesn’t see anyway his business can absorb those increased costs and survive.
And even in cases where remodelers will be able to swallow some of the costs, they may need to reduce their workforce to maintain profit margins.
In an interview with The Wall Street Journal, George Habib, the owner of a remodeling business in San Diego with 50 employees, says that as a result of the tariffs, a $75,000 kitchen renovation would rise to $81,000 – an almost 10% increase. While some homeowners would be able to absorb the added cost, others would hesitate.
But this state of affairs may have a silver lining. The US exports $120 billion a year to China, but China exports $540 billion a year to the US. Therefore, many economists believe that since China is a far more export-based economy, it is at a serious disadvantage in the trade war. Therefore, the possibility exists that short-term pain for the US economy (and consumer) could lead to a long-term gain if there are concessions from the Chinese. This could be the reason that leading Democrats like Senate Minority leader Chuck Schumer (See Here) and House Majority leader Nancy Pelosi (See Here) have supported the administration’s tariff policy as a means to coerce China to end its unfair trade practices, which include forced technology transfers, currency manipulation, intellectual property theft, and their own tariffs on imports from the U.S.
Rising labor Costs
With the unemployment rate at the lowest since 1969, competition among businesses to attract the shrinking pool of unemployed workers have naturally resulted in rising wages. There are now far more job openings in the country than potential employees
According to the Bureau of Labor Statistics (BLS), “In March 2019, the unemployment rate was 3.8% and the job openings rate was 4.7 percent.” Today, as referenced earlier, the unemployment rate is even lower. Hourly wages in April rose 3.2%. And when employers are forced to increase wages, they usually raise prices to the consumer.
Bottom line: Expect increased costs for newly constructed homes and renovations to existing ones.