High gas prices squeezing homebuilders

LOS ANGELES — As if homebuilders didn't have enough to worry about with plunging home prices and rising foreclosures, the surge in oil prices is driving up the cost of key construction materials and further eroding homebuyers' confidence.

Prices have gone up for steel, aluminum, copper, concrete, brick, asphalt and plumbing fixtures, among other materials, and homebuilders are feeling pressure from suppliers to foot the bill. In sum, the wholesale cost of building materials for new home construction rose 3.4 percent overall in April from a year earlier, according to the Labor Department.

"Any material that is petroleum-based or transportation-intensive will have pricing pressure during periods of rising oil prices," said Tony Callahan, senior vice president of Purchasing, Planning & Design for Atlanta-based Beazer Homes USA Inc. "Manufacturers are trying to push cost increases through for materials like asphalt roof shingles, carpet, insulation."

The price increases represent another hurdle for homebuilders, which already are reeling from 40 percent buyer cancellation rates and billions of dollars in write-downs on undeveloped land. The companies are already struggling through the second year of a housing bust that some industry analysts say isn't likely to improve before 2010.

Earlier this week, two rating agencies slashed the debt ratings for several builders. The debt of companies including Ryland, D.R. Horton and Centex has been branded as "junk." So on top of higher material costs, the builders will have to pay higher interest rates if they need to borrow more money.

Many builders have moved to slash costs by switching to less expensive materials for items like flooring and kitchen countertops. Builders also have shifted to constructing smaller houses that cost less to build and can be offered at lower prices.

Callahan said Beazer is favoring suppliers who work to cut costs by reducing the number of trips to a job site, for example, or reducing how much of the material used in projects is wasted.

During a conference call with Wall Street analysts last week, Toll Brothers Inc. CEO Robert Toll was asked what steps the company was taking to reduce material costs amid rising oil prices.

"We're making trips to Saudi Arabia to try to get them to cut down the price of oil so that every other product that we use doesn't go up, but unfortunately, they haven't listened to us," Toll quipped.

The luxury builder, based in Horsham, Pa., has seen prices rise for asphalt-based materials, concrete, steel and other commodities.

"Unfortunately, I think we'll be caught in a squeeze and those costs will go up a little bit, if not more than a little bit," Toll said.

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