It has been a while since inflation has been a factor. However, now we are seeing mass increases across the board in computer chips, construction materials, gas and oil and land to build on. We are not talking about small increases either. Let’s take a couple of items that I am familiar with from residential construction costs. Three months ago, my electrician told me copper wire was zooming up. He offered to store my wire if I bought out the estimated quantities to finish the job at that moment, which I agreed to do. The wire price for 29 townhome residents was $28,000.
Last week he told that the same quantity would cost me $50,000 today. How about a sheet of plywood today at around $100 per sheet whereas a year ago it was about $20. We recently had 50 sheets stolen from our jobsite- a $5,000 loss. The moral of this story is buy copper and lumber instead of stocks and bonds. But seriously, we have been smart with out construction commodities. For example, we have a solid “no price increase” contract.
Being a team player is a must. Having a “no price increase” contract does not mean we did not allow subs to increase their prices but rather we used that leverage to minimize the cost increases. We did not want them to walk off the job and have to chase them on legal grounds. That would have been expensive, so we compromised for all concerns. We also, pre-bought drywall, copper (as mentioned), pavers, exterior stone tiles, plumbing fixtures and changed some specs to like priced items because we could not get the original selections.
All-in-all the supply chain has been severely disrupted by Covid-19. This has also led to some subcontractor’s taking advantage of rising prices and opportunistically raising prices indiscriminately just because they can. I know who they are and I play hard ball more on price gouges.
Interest rates remain fairly steady. Fixed rate mortgage rates are set by the 10-year T-bill rate. The U.S. 10-year Treasury note is the benchmark for U.S. interest rates, as it is the most liquid, heavily-traded debt security issued by the federal government. Just like stock investors turn to the Dow Jones Industrial Average or the S&P 500 Index to gauge how the U.S. stock market is performing, bond investors watch the rise and fall of the 10-year Treasury note to interpret how the interest rate market is doing.
The yield for the 10-year note, which initially is set at auction, ultimately is determined in the open market by buyers and sellers. Investors can get spooked by events in the marketplace causing T- Bill rates to be bid down. In 2020, the 10-year yield peaked at 1.88% on Jan. 2, then began falling. It closed at a record low of 1.33% on Feb. 25, 2020. It continued falling, setting new record lows along the way. By March 9, it had fallen to 0.54%. Investors rushed to safety in response to the uncertain impact of the COVID-19. It recovered throughout the year, and it surpassed 1% in early 2021.
The answer is twofold. On the one hand prices for all kinds of goods and services are going up because of the extreme lack of supply in the marketplace. These are goods and services primarily for immediate use. The ten-year T-Bill has a phycological component that is concerning to investors thereby driving that instrument to record lows. Remember, lower interest rates benefit the government which is paying its (ours too) national debt off. This is not good for retirees, who mostly own their homes debt free and live on a fixed income. Yea, a little inflation could help that.
Stephen Gravett has been a real estate developer for over 45 years and was most recently CEO of Kennedy Homes for the past 11 years and is still CEO of Kennedy Development Partners (KDP). He is also full time Director of Operations for 5 Star Developers. He is a state licensed broker and since 1980 a State licensed General Contractor Unlimited. Before becoming a real estate developer, he flew B-52’s in the US Air Force during the Vietnam War.