The huge spike in lumber prices in the spring has caught the attention of homeowners, builders and subcontractors, and most equate these cost increases as the prime cost of housing. While it is important, timber prices are not the main driver of home prices. Don’t be fooled by assuming that new property prices will come down anytime soon.
Since April 2005, RoMac Building Supply has provided builders and consumers with a free Whole House Commodity Index, which represents the wholesale price of structural building materials supplied to build a 2,000 square foot home in central Florida.
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The index doesn’t include decorative items, HVAC, electrical, plumbing, or labor, but it does take into account everything else inside and out to build this home. The wholesale pricing gives the builder a real overview of what the prices will look like in the next 30 to 45 days.
The index in mid-May was very surprising and opened our eyes. Wood prices fell by an average of around 20 percent from April to May, but the index rose by as much as 1.4 percent to another record high. How can that be?
The increases in foundation fabric, drywall, roofs, doors, windows and cladding such as OSB and CDX plywood offset the increases in wood prices. The building materials supply chain is in tatters as demand outstrips production and everything made with metal is in short supply and prices are rising monthly.
Three years of trade wars and increasing demand in the vast, populated areas like China and India have created a situation in which America is no longer the world’s most important trading partner. In addition, the prices for ocean freight have doubled and tripled with considerable delay times.
To better assess the dramatic rise in home prices since this pandemic started last year, look at these two numbers – since June 2020, a year ago, this index has risen 63.9 percent and since January 1 of this year the increase has been 25.1 percent.
Now consider that land prices are skyrocketing every day as builders and consumers look for dirt to build on and labor costs rise dramatically as the land has an aging workforce and insufficient immigration. There is an enormous shortage of skilled workers. In addition, there are bottlenecks in electrical cables and plumbing parts with much higher prices, which paralyze this scope of work. In short, it’s a mess.
The other factor to consider is that the drop in lumber prices is primarily due to declining demand from big box retailers as much of the country goes on vacation after 15 months of a pandemic, but there is a tsunami of construction starts scheduled for the third and fourth quarters of this year.
A recent article in the Wall Street Journal, using data from the National Realtor Association, suggests the country needs 5.5 million new homes, which would be 2.4 million starts in 5 years. The country has not built enough homes in historical terms in the past decade and the housing market has averaged less than 1.4 million homes a year over the past decade.
This housing demand, if right, will overwhelm the supply chain for some time as companies have limited options to expand production and source raw materials. Expect timber prices to fluctuate and recover, and don’t expect prices to match pre-pandemic levels.
Don’t be fooled by falling timber prices. All other costs, including government regulations and permit costs, will skyrocket. Since most Florida locations have less than a month of housing stock, it can be assumed that availability will remain scarce and prices will rise.
Here’s the caveat that could make things worse – bad hurricane season. In next week’s column, I’ll detail the enormous problems associated with a major hurricane.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc. and the host of the Around the House show, which can be seen on AroundtheHouse.TV.
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