The Expert Podcast

So lumber prices are flagged as having gone down. Lumber prices crashed. Lumber prices fall to their lowest level. Does that mean it's over? Is the lumber crisis done? Is the real estate crisis done? Is everything kind of going back to where it was and we all kind of pack up our anxieties and go back to 2017-18? No, that's not what it means. So don't let the headlines fool you. Lumber prices are down but it says fall to their lowest level in 2022. What does that even mean? It's only May. That just means it's the lowest in the last four months. Means nothing.

And mortgage rates are higher. Sure it is. It says dent housing demand. Well, dent might be a good word. The way this headline reads, it's almost like things are crashing and getting back to normal. But think about if you ever had a dent in your car. Did it ruin the car? Did it really change what the car was all about? No. So if there's a dent in housing demand, that's not going to change anything. So let's talk about lumber price first. What does that mean? Lumber prices fell below 800 on Monday. Well, a couple years ago they were 400 dollars. So it's still double of what it was. Lumber is double. Let that sink in. Lumber is still double.

Now, it's 30 percent year-to-date decline and that's because it was at 1200 in January. But it's at 800, which is still double. It's not going to make a big difference in affordability compared to a few years ago. It says slowdown in demand due to surging mortgage rates. Well, the home builder survey revealed the slowdown in demand. How did the home builders know that it had to do with rising mortgage rates? How did they know that was the reason? The home builder doesn't know why there's less demand. Now it's happening at the same time that mortgage rates are going up, so maybe it's a coincidence, maybe it's cause and effect, but we don't know for sure that's the reason.

Decline comes as mortgage rates soar to levels. Well, I don't know about soar. They've gone up. It raises the cost of buying a house — 5.27 versus 3.11 at the start of the year. It's a 2% difference. It says leads to a mortgage payment difference of well over 1500 depending on the price of the house. Well, that's also a little bit of a misleading thing. For a, let's say, two percent difference to result in fifteen hundred dollars a month more, you have to be talking about a nine hundred thousand dollar house. That's how much of a house raises the payment $1500. So if you're out there looking at a million dollar house, yep, your mortgage rate or your mortgage payment went up 1500.

Most people aren't looking at a 900,000 house. It could be, but that's more than double the average. Almost triple. Well, not triple. Average right now is about 380, 400. So it's more than double the average. So it does make a difference. I'm not saying it doesn't make a difference, but the article is trying to make it seem like more of it is. Home builders slow down an entry level due to payment shock. Well, how much does it make a difference in a payment on an entry-level house? Well, let's say an entry-level house is 400,000 dollars.

Four hundred thousand dollars and you have a two percent increase in rate on a 400,000 dollar house. Well, that's eight thousand dollars a year in interest, which equals probably about 650 a month in payment. Is that a significant amount more? Sure it is. That's a pretty decent jump, 600 dollars a month. But is it payment shock? Well, it could be. But is that the reason why buyers are pausing? It may be. It says first time buyers may not qualify. Debt to income gets out of whack. They may not qualify for that house, but they may qualify for something else.

So we can split hairs and argue about the interest rates all we want. But the most important thing about this article is the lumber price. It's still at 800. And as we've seen before in other videos, it's gone up and down over the last couple years. It's been below 800 before and then back up to 1200. So the key to lumber prices is it's volatile. It's volatile. It's jumping up and down all the time. Builders can't count on the fact even that it's 800 because even if you price out your lumber package right now, by the time you get your permits and site work and foundation and everything in place, it might be six or eight months down the road.

Well, six or eight months it might be back up to 1100. It's probably never gonna go back down to 400 again or 500 even. The market has already shown it can absorb near a thousand on a regular basis and still build homes. Interest rates will have some effect. But remember, interest rates were way more than this. They were almost double this in the 80s and 90s. They were seven, eight, nine percent, even over ten, double digits. People still bought houses, built homes. Homes were cheaper, incomes were less too. So yeah, the lumber prices are down, but it's not a dramatic return to normal. It's not even really a crash. It's a temporary decline.

And if you're a builder, you still have to plan on your lumber package maybe being back up to a thousand or eleven hundred by the time you execute your buy. Unless you want to buy it now and store it for six months, which most builders don't want to do. Probably going to cost you a few grand to do that. You can have some loss or damage in the meantime. You want to buy it and have it delivered when you need it. You don't want to move it twice. So if you're looking to bid a project, you have to bid it on a sliding scale. If you're a homeowner that's doing an addition, remodel, new build, your prices are going to still come in at what the average has been, the rolling average for the last three, four months.

You have to expect that your interest rate's gonna be higher if you're financing it, getting a line of credit. None of this changes the fact that there are still severe supply chain issues. You can get lumber for the most part. Most of the goods you need for lumber are available. Occasionally you might run out on certain things in spot locations, but usually within a week you can get it. You know, if there's a rare size, maybe a six by six you need or certain laminated goods, maybe that might be out of stock, but you can usually get it by the time you need it.

Where really there's a problem are the finish items: countertops, cabinets, appliances, fixtures, some trim items. Those are items that are problematic in terms of getting delivery. Yeah, the prices are up, but the problem is even getting them. There's certain appliances, dishwashers and refrigerators that are out of stock. No time horizon for getting those. That's going to be the bigger problem.

The other big elephant in the room is labor. If you're a builder or a contractor or even a subcontractor, getting help for your projects — even if you're an electrician and you need journeymen to work for you to do some of the busy work — tough to find them. And when you can, you have to pay a lot more for them. And a lot of times they're not reliable, they don't show up. This is the bigger effect on a build than the lumber price.

So when you see this lumber price fluctuating up and down, sure it went down, next week you might see it goes back up. Whether it's 800, 900, 1100 or even at 600, those aren't the big things that are going to affect the construction industry. Interest rates will have an effect certainly, but there still is an undersupply. There still are five million people playing musical chairs that don't have a house to sit down in. Five million too few houses out there. That's not going to change overnight. Interest rates are just going to make it more painful for that renter or that person who doesn't have a home, that's moving out of their parents' house, graduated college, to buy a house. And they still have to buy something. It's just going to be more painful. It'll have a little price pressure on the upper end at the margins, but not necessarily change the number of houses that need to be built. That's still going to be consistent.

Put your comments below. Let us know what you think. Ask any questions. We want to hear from you so we know what are the hot button subjects, the sensitive topics to discuss in future videos. And if you're a contractor, let us know what your experience is. What are you seeing in the market? What are your clients saying? Are they sensitive on price? Are they sensitive on time? Do they want to get done soon so they don't get shut out on their interest rate for their home equity line?

There's also a stealth factor where people are doing that great resignation. They want to quit their job. They want to not work for the man anymore. But if you're buying a house, you can't quit before you close on your deal. So if you're building a house, until that house is built, done, closed, you're moved in, you have to stay locked into your job. And if every day you go in hating it, it might put pressure on you as a builder. So let me hear what your feedback is from your clients, whether it's a rehab remodel client, an addition, or even a new home build. We'd love to hear it.