Impact of Hurricane Katrina on the Building Industry

September 15, 2005

The massive Hurricane Katrina rebuilding effort is expected to be among the biggest and costliest ever and will be even more expensive thanks to the current housing boom. The rebuilding will create new demands for building materials and construction workers, already in short supply because of strong home-building activity around the country.

That could result in even higher costs for those goods and workers, which in turn could affect the housing market everywhere. The full extent of the impact of Hurricane Katrina on the overall economy is still unclear but past experience, together with the visible devastation, provides some basis for projecting the effects on construction activity, the supply and cost of building materials and construction labor, and other implications for the housing market.

Although the loss of tens of thousands of homes implies increased demand for construction of new homes, past experience has shown that there is no massive surge in home building in affected areas. Replacing homes destroyed by the storm will not begin for several months and will take place over a number of years. Total reconstruction costs could run as high as $100 billion, based on the latest estimates, making the Katrina rebuilding effort the costliest in U.S. history.

Katrina caused widespread immediate damage in Louisiana, Mississippi, and Alabama, but the flooding in New Orleans, Mobile, and elsewhere is likely to translate into much larger numbers of homes destroyed. Many of the 200,000 homes in New Orleans along with hundreds of homes elsewhere are expected to require total rebuilding because they are likely to be deemed permanently uninhabitable. Other homes may be salvageable but still need repairs. The floodwaters carried contaminants that cannot easily be removed, and even if the water were clean, prolonged submersion would cause structural damage beyond repair. Either way, it may take a long time before the job is done. Construction delays are common after storms.

The immediate need will be to clean up and repair damage to structures that are still viable before rebuilding begins. The repair process will absorb much of the construction labor near the affected area and several key materials that would otherwise have been used to build new homes. The materials that will be most affected include roofing and wood panels (plywood and OSB). Demand for other materials, such as concrete, is likely to decline initially, as planned projects are cancelled or delayed during the initial recovery period.

The storm will have impacts on the supply of materials as well as demand. The areas affected by the storm have a significant number of wood product facilities that may have been damaged or destroyed. Additionally, damage to port facilities will compound the delays and shortages. New Orleans was the top destination for imports of cement and a number of other building materials into North America in 2004. Congestion caused by diversion of shipping to other ports will also probably disrupt some supplies of materials, as will land transportation problems caused by damage to roads, rail, and reload centres.

Within weeks after Hurricane Andrew hit Florida in 1992, plywood prices in the region jumped 70% while the price of framing lumber rose 35%. It's not clear whether a similar trend will occur this time. The U.S. National Association of Home Builders has released a study on the impact of Hurricane Katrina. From July 1992 to September 1992, the average price for plywood increased from about $222 per 1,000 square feet to $321, and the price of Southern pine framing lumber rose from $264 per 1,000 board feet to $308. The hurricanes in 2004 did not trigger a similar increase, and prices actually fell during the relevant period, after soaring during the preceding year. The combination of greater (partly speculative) demand and disrupted supply produced a spike in lumber and panel prices in the final days of August 2005. With production already running at full capacity for wood panels, further increases for those products, as well as for roofing, are likely.

Expectations of building material shortages caused by post-Katrina reconstruction already are rippling everywhere. The U.S. government is considering cutting hefty tariffs on Canadian softwood and Mexican cement should the task of rebuilding after hurricane Katrina cause construction material prices to jump. It would be an unexpected break for softwood lumber producers, who face duties that exceed 20 per cent in some cases for selling wood to U.S. customers because of a bitter, four-year-old trade dispute.

Of course, things could change in the several months before construction can begin in storm-battered areas. Time will be needed to drain flooded areas, clean up wreckage and sort out insurance claims. Also, repairing the public infrastructure — things such as levees, highways and port facilities is likely to take priority. Until the major reconstruction begins, one group of builders is already primed to see gains: makers of manufactured homes. Last week, the Federal Emergency Management Agency asked several companies to ship existing inventories and speed up production to provide shelter for the hundreds of thousands of people displaced from their homes.

Visit the National Association of Home Builders website to view the press release. National Association of Home Builders