Katrina May Hammer
U.S. Real-Estate Markets

Last week President Bush pledged that the U.S. government would launch "one of the largest reconstruction efforts the world has ever seen" in the hurricane-battered Gulf Coast.

But in an odd twist, rebuilding the homes and businesses that Katrina destroyed could constrain the supply of materials and labor in the rest of the country, spelling trouble for real-estate markets all over. Average prices for framing lumber (think two-by-fours), which had been falling before Katrina, have risen by 14% since the hurricane hit, according to Shawn Church, editor of lumber-industry newsletter Random Lengths. Average structural panel (plywood) prices have risen 38% over the same period.

Those price increases came about because Katrina suddenly put lumber in short supply, says Mr. Church. The hurricane knocked out Southern production and destroyed millions of board feet of lumber and square feet of plywood that was sitting in Gulf ports at a time retailers and distributors were keeping inventories lean.

The impact of reconstruction on the prices of lumber and other important building materials, like cement and gypsum board, hasn't been felt yet. That won't hit until rebuilding begins in earnest. According to mortgage lender Freddie Mac, construction materials account for about one-third of the cost of a new home.

Carpenters, plumbers and other skilled workers may soon be in short supply in many parts of the U.S. as they flock to the Gulf to take part in rebuilding efforts.

"You've already got a very tight construction business nationally," says Lehman Brothers economist Ethan Harris. "This just adds a new layer of pressure on the industry."

Home builders may have a hard time pushing higher costs onto buyers. Higher home prices and an increase, although meager, in long-term interest rates pushed home affordability to a 14-year low in July, according to Raymond James analyst Rick Murray.

"Even if rates don't move significantly higher, we think the market is nearing, or past, a point of exhaustion based on affordability," he says.

But another aftereffect of Katrina may be higher interest rates. Bond-market participants have begun to worry that the amount of money -- estimated at $200 billion and higher -- that will be pumped into reconstruction will prove inflationary. The yield on the 10-year Treasury note fell immediately after the storm hit, on the view that economic growth would be hindered, but it has since risen above its pre-hurricane levels.

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