Inflation is an ever-increasing concern in 2022. The latest U.S. Consumer Price Index shows prices increased a staggering 9.1 percent between June 2021 and June 2022.
As prices rise for consumers, the impact of inflation creeps into every aspect of life, including our spending on home improvements. At this point, it’s causing some homeowners to scale back projects or even hold off altogether.
This reluctance is a new development. As recently as March 2022, a study from Nationwide Insurance found “71 percent who have upcoming projects expect to proceed with them despite higher costs, delayed timelines and limited availability of the materials needed.”
However, continued inflation and greater consumer awareness has flipped that mindset. By June, a Hippo study found 46 percent of recent homebuyers said inflation and price increases kept them from doing planned home projects.
Here are some of the most notable ways inflation is impacting home improvement projects of all sizes.
This is the most obvious impact — higher prices for everything, from paint and plaster to sinks and drywall screws. To make matters worse, the cost of lumber has skyrocketed since 2020, even when adjusted for inflation.
With lumber costs, supply chain issues and inflation, so many factors are forcing prices upward that these higher costs appear to be here for the foreseeable future. Even if prices suddenly came down, contractors are unlikely to reduce their rates, for fear of prices spiking again.
Historically, fuel costs are more volatile than overall inflation, and that’s certainly true in 2022. Currently, gas prices are almost 60 percent higher than this time last year. That’s bad news for everyone, but especially in construction, where fuel costs are felt more than many other industries.
Contractors need large vehicles that can haul tremendous weight, and those big trucks don’t get great gas mileage. Every time gas prices rise, contractors charge more to keep fuel in their tanks. Increased fuel costs also make construction vehicles like front-end loaders, dump trucks and cranes more expensive to operate.
Transportation costs are up as well. It’s one thing to factor in fuel costs when running a backhoe, but that backhoe must be driven to the jobsite on a large truck. Construction material and trash containers have to get to the jobsite as well, and all that movement requires fuel. Suddenly, something as simple as digging a trench now costs significantly more than it did a year ago.
Many homeowners pay for home improvement projects with loans, whether refinancing or tapping a Home Equity Line of Credit. With the Federal Reserve raising interest rates to combat inflation, these home improvement loans are becoming more expensive. In some cases, they come with more strings attached.
The one-two punch of rising construction costs and higher rates means homeowners may be forced to extend themselves further to cover the cost of the project, increasing the risk of loan default. Lenders are aware of this higher risk. Some are requiring additional assurances, like contingency reserves (cash the homeowner needs to keep on hand) or more stringent change order procedures.
Of course, homeowners aren’t the only ones taking out loans. Contractors are also facing rising interest rates on business and equipment loans, and this higher operating cost gets passed on to the homeowner.
The rise in loan rates also has ripple effects. As mortgage rates increase, the demand for new builds goes down. Homeowners who already have a home are more likely to invest in improvements than buy new, which drives demand for remodelers.
It’s worth noting that as of this writing, home sales have not yet decreased. Whether those strong sales will continue in the face of rising home prices and interest rates remains to be seen. However, new build permits and housing starts have decreased.
The industry is already suffering from a shortage of skilled workers, and the uptick in home renovations in 2020 and 2021 meant many remodelers already have a waiting list of clients. There’s a good chance homeowners looking to hire a pro will have to wait longer than usual if inflation continues.