by Peter Crowley, President of RE/MAX Alliance Group
It has been well documented that the costs for supplies for new construction have risen steadily since the pandemic – a simple function of supply and demand impacting the cost of steel, concrete, and most importantly, lumber. These escalating costs have forced several builders to stop or significantly reduce the number of homes that they are producing for fear of absorbing those increases and eroding their profit margins.
The reason for this imbalance in supply and demand, particularly with lumber, is a congruence of factors. Many lumber mills were forced to shut down their factories at the onset of the pandemic. Furthermore, as mills began to open, the industry underestimated the intense demand stemming from both the home improvement projects spurred on by being “locked” inside for months, as well as resurging demand in new homes for people looking to relocate or upgrade in the post-pandemic economy. This imbalance of supply and demand has led lumber prices to reach a peak of over $1600 per thousand board feet in early May (as a point of reference, the price was less than $400 per thousand board feet a year ago). As lumber suppliers woke up to the increased demand, they have been slow to respond with an increase in production due to the far-reaching labor shortages brought about by the pandemic.
There seems to be a light at the end of the tunnel, however. As more workers return to the mills and the mills begin to operate at full capacity, the production of lumber is gradually picking up pace. Furthermore, some of the demand from stimulus driven remodeling projects has dampened, thus bringing the supply and demand curve closer to some semblance of normal. The previously mentioned pause by many home builders is also loosening up the demand for lumber. The result is a dramatic drop in the lumber futures market, which has tumbled more than 45% (closing just below 900 on June 18). While lumber is the most dramatic example of this increase in supply, most of the other materials and components of new construction are following a similar trend.
Does this mean new home prices are going to come crashing down and buyers should wait? Not so fast. What it hopefully means is that builders will be able to resume a more “normal” pace of construction to start to fill the huge gap of new home units needed to keep up with the current level of demand – by some estimations the nation is lacking more than 3 million homes to satisfy demand. The additional supply of new homes is necessary to supplement the anemic existing home inventory to merely keep up with the existing level of demand.
What is significant about the rapid decline in the lumber futures market is the possibility that the inflation pressures that we have experienced recently (the Consumer Price Index rose by 5% – the fastest pace in 13 years) are only temporary because of these wild fluctuations in materials costs brought on by the pandemic. This seems to be the basis of the Federal Reserve’s stance to keep interest rates low – citing these as temporary inflationary pressures rather than permanent.
The coming months will be telling to determine if these fluctuations in prices were indeed driven by supply challenges brought on by the pandemic. If so, we should expect to see a stabilization in the cost of new construction and renewed confidence by the building industry to resume a normal level of housing construction. A more modest inflationary environment should also lead to a more sustained economic recovery, which is welcome news as we approach our new normal.
We would like to thank our guest author Peter Crowley
Larry and Ann Brzostek
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