Don’t get taken advantage of when home shopping
The massive surge in wood prices in the spring has caught the attention of homeowners, builders and subcontractors, most equating these cost increases with the main cost of housing. While important, wood price is not the main driver of home prices. Don’t be fooled into assuming that the prices of new homes will fall soon.
Since April 2005, RoMac Building Supply has released a free Whole House Commodity Index to builders and consumers that charts 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 does not include decor items, HVAC, electrical, plumbing, or labor, but it accounts for everything else inside and out to build this home. By using wholesale prices, the builder gets a realistic picture of the pricing in the next 30 to 45 days.
The mid-May index was very surprising and eye-opening. Timber prices fell by about 20 percent on average from April to May, but the index rose 1.4 percent to a new record. How is that possible?
The increases in foundation mesh, drywall, roofing, doors, windows and sheathing such as OSB and CDX plywood offset the increases in timber price. The building materials supply chain is in shambles as demand exceeds production, and anything made with metal is scarce and rising in prices monthly.
Three years of trade wars and rising demand in vast, populated areas such as China and India have created a situation where America is no longer the world’s most important trading partner. In addition, ocean freight rates have doubled and tripled in price with significant delays.
To better gauge the dramatic rise in the price of a home since the start of this pandemic last year, take a look at these two numbers – since June 2020, a year ago, this index is up 63.9 percent, and since January 1, this year the increase is 25.1 percent.
Now consider, land prices are rising daily as builders and consumers look for dirt to build on, and labor costs have risen dramatically because the country has an aging workforce and not enough immigration. There is a huge shortage of skilled workers. In addition, there are shortages of electrical wiring and plumbing parts with much higher prices that cripple those job areas. In short, it’s a mess.
The other factor to consider is that the decline in timber prices is mainly due to declining demand for Big Box retailers as much of the country goes on vacation after 15 months of pandemic, but there is a Tsunami of housing starts planned for the third and fourth quarter of this year.
A recent Wall Street Journal article using data from the National Realtor Association suggests that the country needs 5.5 million new homes, which equates to 2.4 million homes in use over 5 years. The country has not built enough homes on a historic level in the past decade, and the housing market averaged less than 1.4 million homes per year for the past decade.
This demand for housing, if true, will overwhelm the supply chain for some time as companies have limited opportunities to expand production and obtain raw materials. Expect wood prices to be volatile and bounce back, and don’t expect prices at pre-pandemic levels.
Don’t be fooled by a fall in wood prices. All other costs, including government regulations and licensing fees, are skyrocketing. Since most Florida locations have less than a month’s worth of housing stock, expect availability to remain tight and prices to rise.
Here’s the caveat that could make things worse – a bad hurricane season. In next week’s column, I’ll detail the enormous problems that come with a major hurricane hitting the country.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc., and he is also the host of the “Around the House” Show which can be seen on AroundtheHouse.TV.