For several years now, AIPIS CEO and founder, Jason Hartman, has been talking about the inevitable rise in costs of the basic materials needed to build a house: lumber, gypsum, tar roofing, insulation, concrete, copper, etc. Continued inflation plays a part in these price increases, of course, but perhaps not as much as the burgeoning middle class in China and India. In those two incredibly populous nations, each year of economic prosperity brings more people within reach of owning their own home.
In short, worldwide demand for housing materials is already skyrocketing.
One reason Jason is so fond of income property investing is the idea that what you’re actually investing in is the basic commodities used in construction. In case you didn’t know, 60 percent of a new home’s price is accounted for by construction costs. This concept is so important that Jason coined a term for it: Packaged Commodity Investing.
How much have building materials prices increased? Here are a few examples of price hikes in the past year:
- Softwood lumber – 30%
- Gypsum (drywall) – 17.9%
- Tar roofing – 8.6%
- Insulation – 5.3%
- Concrete – 2.2%
The important thing for real estate investors to keep in mind is that higher construction costs lead to higher home prices. We sincerely hope that you have been in a position to take advantage of the recent rock bottom rates afforded by the worst US housing industry downturn since the 1930s. At AIPIS, we knew home prices would recover – they always do. What we don’t know (no one does) is how quickly and to what extent. There are two basic outcomes here, both of which position income property landlords perfectly to earn a great return on investment.
Outcome #1: Rising commodity prices put a damper on new housing starts, leading to another round of depressed prices. No big deal for the income property investor. Simply buy more properties at discounted prices.
Outcome #2: Rising commodity prices send the prices of new homes ever higher. Higher new home prices means there will be fewer people able to qualify for loans, thus more renters. For the income property investor, more renters in the market is always a good thing.
The real takeaway is for mortgage and real estate professionals to understand what a critical role basic commodity prices play in the housing industry. Ignore this at your own peril! (Top image: Flickr | sherrattsam)
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28% ROI Should Get Their Attention
The AIPIS Team
