Geopolitical Events and Building Costs

The cost of building a home decreased as a result of a drop in commodity prices, low oil prices, and a strong USA dollar.\r\n

Commodity Prices

\r\nWhat does the price of clay in China have to do with the price of an American home? The connection may not be obvious at first, but it’s there nonetheless. The connection stems from the cost of one of the materials used to build American homes. In this case, that material the clay used in the production of tile.\r\n\r\nTile, whether ceramic or porcelain, starts its life as clay. The clay is shaped and fired in a kiln to form the body of the tile, then fired again to arrive at a finished product. Many years ago, clay was sourced from natural deposits, often found in river beds, and finding the right kind of clay was half the tile-making battle.\r\n\r\nOver the years, the process became increasingly mechanized. Clay is now be made in a factory. As the Chinese have invested in building new factories devoted to clay production, the price of clay has dropped. As a consequence, the price of the finished product, the ceramic or porcelain tile that is ubiquitous in kitchens and bathrooms everywhere, has dropped as well.\r\n\r\nUltimately, those lower prices benefit the homebuyer, as the cost of materials is and always will be a major component of the price of a home. Decreases in the price of materials themselves are only part of the picture. There are other macroeconomic trends and geopolitical events that affect the costs of homes in the USA.\r\n

Oil Prices

\r\nAs another example, the cost of fuel effects the cost of each and every material that must be shipped to each and every building site. Oil prices worldwide have been declining for some time. Now that sanctions on Iran have been lifted, Iran is going to flood the market with oil. Combine that with Saudi Arabia increasing production, and we have a recipe for cheap oil for some time.\r\n\r\nBuilding a home is energy intensive on two fronts. Firstly, actually creating the materials needed to build a home is an energy intensive process. Secondly, the materials need to be shipped to the building site, and that requires energy.\r\n\r\nCheap oil (and the resulting cheap gas) allows home builders to realize savings as a result of a lower cost of raw materials. Since factories that make finished goods are spending less on energy, in the cost of those goods. When energy prices drop, there is money to be saved on everything from appliances and plumbing fixtures to ductwork and copper pipe.\r\n

Strong Dollar

\r\nFinally, a strong dollar has lowered the effective cost of imports across the board for American consumers. Since we import vast quantities of lumber from Canada, we have seen costs drop substantially as a result of the dollar’s strength against its Canadian counterpart.\r\n\r\nThe combination of low commodity prices, cheaper energy and a strong dollar all add up to real and significant savings for homebuyers. Add to those factors the prevalence of low mortgage rates and low inflation in the housing market and elsewhere, and it’s hard to imagine a better time to purchase a home.