As the pace of building continues to accelerate across the United States, one constant challenge that builders have had to face is the volatility of building material costs. From the price of pouring a concrete slab to plumbing & HVAC, every phase of building a home has been impacted by a combination of builder demand and supply chain challenges.
How We Got Here
One critical factor in home building, the price of lumber, has seen unprecedented and historical price spikes.
Uncertainty around the pandemic forced lumber mills to slow production to avoid getting upside down on unused inventory. Little did they know, lumber demand would soar with an increased buyer appetite for housing and from projects that DIYers put off now finding new life. Once production was ramped back up, mills were faced with supply chain interruptions slowing delivery of goods, adding yet another piece of fuel to the price increase fire.
Price of Lumber Beginning to Trend Downward
However, relief seems to be on the way as the country inches closer to a true sense of pre-pandemic normalcy. As a result, lumber prices are showing a slow retreat since reaching record high prices in May.
According to the Wall Street Journal, lumber futures are projected to be under $1,000 ($996.20) by July, down 42% from the record of $1,711.20 reached in early May. As of June 15th, lumber futures have declined 14 out of the past 15 days. While a relief to builders, lumber futures remain three times what is typical for this time of year.
Kyle Little, Sherwood Lumber’s Chief Operating Officer, is not surprised by the news. Little thinks the decline was “inevitable”. He continues, “We moved up to extreme hyper highs here over the first half of 2021 after a record move in 2020…when you have over a 400% price move in about 15 months, the volatility involved with that will lead to price adjustments like we are experiencing right now.”
Short Term Impacts
The decline in pricing cannot come soon enough. According to the National Association of Home Builders (NAHB), the builder confidence metric used by NAHB fell two points in June, down from 83 points to 81. However, based on historical data, having a score above 80 still signals strong demand in a housing marketing lacking inventory. Two leading indicators, higher costs, and a declining availability of select materials pushed the score downward.
For the short term, Lumber producers and traders expect that the prices will remain high due to the strong housing market. However, with supply chain bottlenecks loosening, coupled with reduced frenzied buying, pricing should fall back to near normal levels. Little believes that, based on their analysis, “we might have passed the peak so to speak…we will trade at a really, really high range for the remainder of this year-end well into 2022.” Devin Stockfish, CEO of Weyerhaeuser, shares the same sentiment and takes it a step further. At a recent Investor Conference Stockfish stated that, “I don’t believe $1,000 lumber prices are the new normal…with that said, when you think about the amount of housing we’re going to have to build in the U.S…that’s a significant amount of demand for wood products.”
How Can Builders Capital Help?
Builders Capital is uniquely positioned to ride this wave with borrowers with our ability to provide customized lending solutions. Our Servicing Team works quickly to fund draws to keep the borrower’s vendors paid and minimize the impact of the cost of goods affecting the borrower’s bottom line. With our loan servicing being 100% in house, a borrower always knows we are there for them if unexpected challenges arise. This is not the first time the cost of goods has risen, and it won’t be the last. Our leadership team has over 100 years of experience and is constantly looking ahead to insulate their borrowers from challenges. As this current supply fluctuation runs its course, Builders Capital will be one step ahead in finding solutions to any new challenges that may arise.