Led by scrap steel costs, which soared 80% since last year, several key building materials have posted double-digit increases over the past 12 months. Steel mill products jumped 43%, lumber prices are up 27%, gypsum 20% and cement 6%.

"This is a normal commodity price cycle and we are currently at the peak," said John Mothersole, senior member of Global Insight's Industry Practice. "We believe that commodity prices are topping out and moving on a downward slope. However, the bad news is that the ride down won't be too steep in 2005."

Commodity prices are determined by international factors, Mothersole noted, and while the U.S. consumes about 13% of the world's steel products, China is now almost three times larger in terms of production and consumption.

China's phenomenal growth has caused global demand to exceed capacity, leading to a huge price run-up, he said.

Shipping capacity has also been strained, causing transportation prices to soar. "A year ago, a tanker cost $35,000 a day. Today that cost is $135,000," he said.

Mothersole forecast that steel prices will start declining in the current quarter and continue to ease through 2005 because of several factors: steel products are profitable, so more plants will be coming online; additional shipping capacity will be added; and, because U.S. steel prices are set above the global rate, there is an incentive to sell more product to the American market.

"We expect more significant price declines in 2006 and 2007 as ore and coke become more plentiful," he said.

In the case of cement, with lean inventories on hand, the housing industry this year has been caught flat-footed by surging demand. High shipping rates and rail bottlenecks have exacerbated the problem, resulting in spot shortages and an 8% price hike from the second quarter of 2003 to 2004.

Eliminating costly tariffs on Mexican cement imports would help alleviate the shortages, but Mothersole said he does not expect this problem to be resolved soon. Import availability and transportation issues are not expected to be corrected in the next eight months, he added, and as a result of Florida's massive rebuilding efforts, cement prices won't reach their peak until next spring, after which there will be modest declines.

The price of gypsum has increased roughly 20% this year, but price gains for this product should fall into the 6% range next year, as sales slow and imports rise.

"Volatile" is the word that best describes lumber and panel prices, according to Al Schuler, research economist for the USDA Forest Service.

"Volatility is the nature of the beast, but we expect prices to moderate next year in response to a pullback in housing and increased supply," he said.

A persistent problem with oriented strand board (OSB) is that its producers have failed to "read the tea leaves," Schuler said. In the mid-1990s, the industry overbuilt capacity, resulting in weak pricing and miniscule profits. During the past few years, the industry underestimated demand and cut back production.

"Nobody wants to hold inventory because it costs money, but no inventory in the pipeline breeds volatility," said Schuler, who noted that the top five structural panel producers account for 75% of the overall market share.

OSB capacity will remain relatively fixed in the short-term because it takes up to two years to build a new OSB mill and at least another 18 months to ramp up to full production. Several new mills in Canada and the U.S. are in the planning stages and as capacity increases in the coming years, OSB prices are expected to decline.

Schuler noted that the U.S./Canada trade dispute on softwood lumber has contributed to price volatility during the past three years. In late August, a NAFTA panel found that the 27% duties on Canadian softwood lumber should be rescinded because domestic lumber producers failed to prove that imports pose a threat to their health.

The U.S. intends to issue legal challenges to the NAFTA ruling, and Schuler is guessing that a negotiated settlement with duties of 15% or less will be reached in 2005.

Settlement of the issue would decrease volatility and ease upward pressure on lumber prices. How much depends on many factors, said Schuler, including demand, alternative supply from domestic and non-Canadian sources and non-wood substitutes.

During the next couple of years, Schuler said he anticipates that OSB prices will decline 30%-35%, and increased South American imports should lead to a 15% decline in plywood and softwood lumber prices.

ABOUT NAHB: The National Association of Home Builders is a Washington-based trade association representing more than 215,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction. Known as "the voice of the housing industry," NAHB is affiliated with more than 800 state and local home builders associations around the country. NAHB's builder members will construct about 80 percent of the more than 1.77 million new housing units projected for 2004, making housing one of the largest engines of economic growth in the country.