Housing USA: Bracing for Gas Price Hikes

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5 min read

Fuel prices are increasing, with the per-gallon cost of gasoline up 47 percent year over year and the cost of diesel up 63 percent over that same period. According to CNN Business, the shockingly high prices could persist into at least September, warning “even a $5 per gallon national average is not out of the question.” This is adding stress to the already-beleaguered home construction industry, and as we’ve noted in other Tax Credit Advisor pieces about this inflationary period, the Low Income Housing Tax Credit industry won’t be immune. Costs are slated to increase for affordable projects, both on the development and management end, and for renters. The two most immediate areas of impact are in materials and transportation.

Materials

Construction is fundamentally tied to fuel prices.

“A lot of the products that go into housing are petroleum-based products,” says Steven Webb, legislative affairs director for the North Carolina Homebuilder’s Association.

Ken Simonson, chief economist with the Associated General Contractors of America, notes in an interview that this makes construction uniquely vulnerable to fuel price increases. The materials themselves embed lots of energy use, with the process for making concrete and asphalt, for example, requiring much crude oil.

Research of European markets by the Dutch financial services firm ING projects that fuel prices will impact the cost of bricks and timber as well. Studying the European Union, ING found that while contractors themselves use relatively little fuel, the horticultural and manufacturing process for sourcing materials is particularly reliant on natural gas.

These trends are already taking shape in the U.S. As of late March, input costs for residential development had jumped over 24 percent over the prior year. Costs were already high early in 2022 thanks to loose monetary policy and COVID-induced supply-chain shortages, but the Russian-Ukrainian war exacerbated them, says Simonson. To name one example, the cost of studs has quadrupled to $8 in a few years.

Ron Jackson, a Pinehurst, NC-based developer who primarily builds housing in the $200k to $300k/unit range, stressed that plywood has also quadrupled to $38 per board, while Webb has seen costs up to $45.

And the supply-chain problem has left some materials missing altogether. Jackson and Webb both note that materials like garage doors, vinyl siding, appliances and certain paint colors are harder to come by.

“There’s a 45-day wait on sliding glass doors,” says Webb.

Transportation

Webb observes that in North Carolina, the cost of diesel has reached $5.50 per gallon – well above the per-gallon costs of standard fuel. This matters, because many of the trucks and heavy machinery involved in the transport of home construction goods and on-site assembly run on diesel. As a result, the construction process is becoming more expensive, with many of these vehicles having 200-gallon gas tanks and relatively low fuel economy due to their size and cargo demands.

“The contractors use a lot of fuel directly for both their own vehicles and off-road equipment,” Simonson says, “particularly if they’re doing excavating or earth moving, but also the power lifting equipment, and then they pay directly or indirectly for the thousands of deliveries of equipment and materials to a job site and the hauling away of dirt and debris at the end of the job.”

Simonson points out that many of the materials used in concrete have a higher transportation cost. “Those are very dense items, the cement and the sand and the aggregate, and so trucking them to the job site has a higher transportation cost than many of the goods that go into construction, let alone what the general public experiences.”

Gas prices are also impacting the trucker labor pool. Since many truckers are independent contractors, they aren’t able to cover the cost of fuel increases and have stopped working, making freight costs more expensive. As some firms require employees to return to the office, they too should increase travel demands and push up gas prices.

The Impact

The obvious initial problem with these rising fuel costs is that they’ll be passed down by the development industry, serving as a regressive tax on homebuyers and tenants. This matters particularly for renters in LIHTC projects, who earn less than Area Median Income.

But it’s possible that longer term, these increases, combined with supply chain issues, could slow construction. Granted, this hasn’t occurred yet – housing permits have risen over the pandemic due to the pent-up demand for different types of housing in different locations. But where rising fuel prices (and inflation in general) might cool this momentum is the Federal Reserve raising interest rates, which will make borrowing more expensive, thus reducing housing demand. Already the Fed increased its rate by 75 basis points; correspondingly, this caused 30-year fixed-rate mortgages to spike to 5.1 percent. 

Meanwhile, the development sector is addressing the issue as best it can to keep projects moving. For example, Jackson has been reimbursing employees for their gas costs. But it’s cutting into contractors’ bottom lines – as contractor Joseph Shrock told Equipment World, “I don’t know that there’s a magic bullet out there other than absorbing it and just being less profitable through these times.”

Simonson expresses cautious optimism that sharp price increases are behind us, but also stresses that the overall supply chain situation is “unfortunately very uncertain,” in light of factors, such as China’s ongoing COVID lockdowns, the prospect of labor unrest at ports, the war in Ukraine and the potential for other unseen crises.

There are measures that the federal government can take to reduce these burdens, such as having looser trade and immigration policy, or encouraging more domestic energy production. At the state level, housing authorities can provide relief for LIHTC developers dealing with rising costs. And locally, officials can work to reverse the anti-development politics that exacerbate this problem.

This article featured additional reporting from Market Urbanism Report content manager Ethan Finlan.