How much does a new, custom-built home cost?
Depending on a variety of variables, still more than it did pre-pandemic.
Like other commodities during the last several years, lumber prices and their volatility have thrown an expensive wrench in the gears of many home building projects.
For custom home builders, an increase in price for any construction material should raise an eyebrow. Ultimately those increases make their way to the future homeowner, making the dream of custom home ownership less affordable and more challenging to obtain.
But it’s been almost three years since the COVID-19 pandemic started. And hasn’t life gone back to normal?
With commodities markets characterized by drastic fluctuation, both builders and future homeowners may be wondering, “Will lumber prices go down in 2023?” or “How do I lessen the impact of increasing material prices?”
In new construction, finding strength in numbers and construction efficiencies are two ways to put pressure on rising costs
Lumber Prices: What Happened?
First, a recap.
Beginning in 2020 and running through 2022, lumber prices were characterized by two things: being high and fluctuating. The simple explanation for both was the pandemic and its effects on global commerce, including:
- Reduced lumber production
- A housing boom
- Supply chain disruption
1. Reduced Lumber Production
Once the pandemic hit, entire supply chains were crippled. Raw materials of all sorts became harder to come by -- lumber included.
Across the country, logging operations and sawmills were shut down or drastically reduced operations for many months, creating a lumber shortage. Imported lumber and timber that supplemented domestic production became hard to come by as international trade came to a near-standstill.
The laws of supply and demand kicked into high gear. With an imbalance of available lumber against consumer demand, lumber prices skyrocketed. Lumber price charts show prices spiking by about 280%, or more than doubling with prices peaking at $1,418 per thousand board feet in May 2021.
2. A Housing Boom
The pandemic housing boom compounded matters more. Throughout 2020 and 2021, the real estate market was a seller’s dream. Many who lived in crowded urban areas looked to leave while existing homeowners found they needed bigger spaces. With a limited inventory of homes for sale, house prices skyrocketed.
Those who turned to new construction for their next home found themselves competing for a limited supply of building materials.
3. Supply Chain Disruption
Though lumber production had mostly resumed both domestically and abroad, the supporting supply chain never fully recovered.
Both in the U.S. and internationally, ports and delivery services found themselves short-staffed or still operating under restrictive public health guidelines. With limited workers, the ability to process goods at pre-pandemic level was nearly impossible. Shipping prices -- from container costs to transit expenses -- increased to make up for budget shortfalls.
Compound matters more -- consumer demand hasn’t let up either. Again, the laws of supply and demand apply, keeping prices well above where they were before the pandemic.
Timber! Will Down Go Lumber Prices in 2023?
So now what? Will lumber prices go down in 2023?
In short, the lumber prices forecast for 2023 is looking the brightest it has since 2020.
In December, lumber prices hit thier lowest level, falling briefly below the $400 per thousand board feet mark (a key indicator for the market performance of this commodity.) That low caps a nine-month decline in lumber prices.
However, market analysts expect lumber prices to rally (increase) throughout 2023.
Why? A few reasons that should seem familiar.
Reduced Lumber Production
Becasue of reduced consumer demand and the disruptions to the global lumber market from the ongoing war in Ukraine, there’s less lumber being produced.
Certainly, that’s not to say that lumber will become scarce. Rather production levels are matching demand and prices are following suit.
The Housing Market
The housing boom we saw during the pandemic has slowed down. With the housing market easing up, more people are able to find existing homes, meaning fewer people are considering new builds.
Supply Chain Disruptions
While global supply chains are mostly open, there are still some major issues impacting the free flow of goods.
Internationally, there remains a shortage of workers at ports, meaning processing time for shipments is down and labor costs are up. Domestically, the railroad worker strike could continue into 2023.
Reducing the Impact of Lumber Prices Regardless of World Events
While there’s no way to insulate an industry from the effects of a global event, there are ways to reduce their impacts. For custom home builders, partnering with a building materials supplier that has an established network and efficient construction method brings some stability to materials costs.
Affiliating With a Building Materials Supplier
Why does partnering with a building materials supplier help mitigate costs?
Strength in numbers.
With a collective of construction companies working through a single source, purchases of commodities such as lumber are made in bulk.
Like prices going up because of a limited supply trying to meet increased demand, bulk purchases take on the laws of economics in a different way. Items bought in smaller quantities require more resources -- whether it’s manpower or packaging materials -- to make their way from the manufacturer to your doorstep.
Purchasing items in large orders drives down the cost per unit -- even if it’s by a few pennies -- as there’s ultimately less work and other materials, such as packaging, involved. In bulk purchases, pennies saved add up quickly to a noticeably lower price.
Home Construction That’s Efficient
Another way custom home builders can control construction costs is by building homes using a process rooted in efficiency. Panelized construction is designed to do just that.
Through panelized construction, a home’s wall panels and other structural components are built off-site in a factory. In creating the parts of a home in a factory setting, there are controls over the amount of materials used and how far they go.
Materials are ordered in exact quantities and assembled to specific measurements, eliminating waste. In other words, there isn’t much useless scrap left over from that bulk order of lumber. The client only pays for the materials actually needed to create their next home.
Once delivered to the construction site, a panelized home goes up quickly, with no need for additional materials to assemble it.
Creating Some Immunity to Lumber Price Spikes
While there’s no way to predict the impact an event will have on lumber prices and home construction costs, there are two important steps your home building company can take to shelter itself.
Aligning your home building company with an established material supply increases value for you and your customer. And using an efficient building method ensures you’re not using more than you have to.
Barden Independent Dealers Enjoy More Than Buying Power
Learn more about the benefits of becoming a Barden Independent Dealer. Contact us today!
After surging to notable peaks of $1,400 per contract in May 2021 and a similarly impressive $1,300 in February 2022, the continuous contract prices for Random Length Lumber are currently in search of a market floor. As of May 15, 2023, prices had plummeted to $344, marking a three-year low that was only slightly surpassed by the knee-jerk collapse in prices during the initial weeks of the COVID-19 pandemic. Prior to the disruption caused by the pandemic, lumber prices had traded within a narrow range of $390 to $440 per contract.
The downward trajectory of lumber pricing has played a significant role in the overall decline of construction material prices. According to ConstructConnect's construction materials prices index, material prices have experienced annualized declines ranging from 4% to 6% in recent months. However, this seemingly modest decline obscures the stark reality of lumber's 53% price drop over the 12-month period ending in May 2023, making it one of the most severe declines among all construction commodities.
Several factors are putting pressure on lumber demand. Home construction, a significant consumer of lumber, has been particularly hard hit, as evidenced by the substantial decline in new home sales this year. This decline has been in large part triggered by quickly rising mortgage rates which have nearly doubled since early 2022.
ConstructConnect's May 2023 residential starts data, released in June, revealed a staggering 35% year-on-year decline and a 31% year-to-date fall. Unless the dynamics of the housing market improve, it is likely that lumber prices will continue to remain depressed. This rapid collapse in demand may explain why the level of lumber inventory and related materials relative to sales is at its second-highest level since 2009.
Future lumber demand also appears weak, according to data from random-length lumber trading contracts. The volume of outstanding ‘long’ lumber contract positions, which are typically used when traders anticipate future price increases, have dwindled to multi-decade lows. A clear signal that market traders have little concern for future price appreciation.
As construction materials, in general, fall in price and lumber in particular, construction firms would do well to preserve their capital by carefully managing their inventories based on current demand estimates. By resisting the urge of just two and three years ago to hold, or even hoard, excessive inventory, contractors can properly manage their exposure to further commodities price movements. The risk of having too much capital tied up in inventory that has the potential to further depreciate will unnecessarily restrain the ability of affected firms to conserve and or deploy their capital in more productive ways, especially should a recession occur.
Comments
0