The Expert Podcast

So you might be thinking, look, if the real estate market is going down and home sales are reducing, interest rates are going up, why can't I get cheap lumber? Well, the lumber prices have gone down at the wholesale level. The price for a thousand board feet of lumber has gone from 1400 and change all the way down to about 700 — so maybe half of what it was maybe a year, a year and a half ago. But depending upon where you're located, that might not be translating into a reduction in price at your local lumber yard, your retail lumber yard.

If you're a builder, wherever you get your build packages, you may not be seeing half-price lumber. You probably aren't. It may have gone down a little bit but it's not half price. Why is that? And here's some backup of this information from the Globe and Mail: Don't expect pre-pandemic level markdowns for your DIY project for lumber. Even though the lumber prices are falling—the wholesale price—the retail price is not going to fall that much.

Why is that? Let's take a look. First, retailers still have leftover stock purchased at higher prices, and producers are avoiding flooding the market. So a lot of the inventory that's at a lumber yard was purchased by that retailer months ago when the price was high, so they have to use that cost basis. At the same time, the wholesale producers, the mills, are not overdoing it with producing more boards, and the reason why is because they know demand is down.

If they produce too much, they're going to have a glut. It costs them a certain amount to produce lumber, and if the price that's paid goes below what it costs them to make it, they're just not going to make it. Many sawmills are scaling back production because their inventories are larger than usual, so don't expect a glut on the market this summer, experts say.

When retail prices do drift down, they're expected to be sharply higher than the pre-pandemic prices of 2019. Once the dust settles on the lumber yards cutting back production, buyers may be coming back, they'll have a new equilibrium for supply and demand, and prices will bounce off that. That's what they're expecting.

This is a classic bounce pattern where there's an oversupply going into the pandemic, then all of a sudden there's a perceived market reduction in demand, so the lumber yards cut back, they lay people off, they stop purchasing, and there were also some weather events—it was some flooding and fires in Vancouver and in British Columbia in the province—which cut back on supply.

Then right at the same time when the supply line was cut back, demand went up. People wanted to do additions on their house because of the pandemic. They wanted to remodel their house because of the pandemic. They were locked in; they had to fix up their house.

The home building crisis that everybody predicted in 2020 didn't happen. People were desperate for buying a house, the housing market went through the roof, home prices went up 40, 50 in some areas, sometimes more. So builders were scrambling to get product, so the lumber prices spiked. That's when it went up to 1500, 1400 and change.

Now that there's more equilibrium, people see now what is the real market. Who wants to buy lumber? All the DIY projects are pretty much done. The home building now has an expectation of what the market's going to be—how many people are going to be out there buying new homes. The builders, the contractors know what their project timeline workflow is going to be like, how many projects they're going to have a year. So you can factor that in.

Part of the factor is not having enough labor to build houses. And you might think that this drop in demand will also reduce the lumber prices. The problem is the mills and then wholesalers still have their basic overhead—payroll, rent, utilities, insurance, trucking. All of those have gone up and they all stay the same whether you sell one two-by-four or a million two-by-fours.

You pay the same rent for your building, whether you ship one two-by-four or a truckload. You still pay the same gas for that truck. So you have to divide up your sales over fewer individual sales volume. You have to divide up your overhead over fewer individual sales volume, so you might need to have a higher profit margin on each sale to keep your overhead paid for.

And the overhead now is higher than it was in 2019 because in 2019 you didn't have inflation of gas, utilities, insurance, maybe commercial rent, certainly payroll went up. Many companies’ payroll is 20 percent higher than it was even two and a half years ago, and payroll in some companies is 30 percent of your P&L, so that could mean a pretty significant increase in your fixed expenses—your overhead so to speak.

So if you're a lumber yard, you're a retailer, you need to factor that in. So if you know you're going to sell less volume of materials, you actually have to have a higher price. So supply and demand really doesn't matter—you have to still pay your bills.

At the same time, consumers—the end user of a home construction project, the builder, the developer who's building a subdivision—they have now realized that even at 1400 for lumber, we could still sell houses. We could still sell remodel jobs. We could still sell additions factoring in even at a higher price, the appetite for that was still there.

Now, granted, some of the appetite might be a little lower because interest rates are higher, inflation is higher, people don't have as much money after paying, you know, eighty dollars to fill up their gas tank in their car, but there's still a market and it's higher than what it was before.

Well, like we've said many times, the trading range for lumber was three to five hundred dollars per thousand board feet. It went up to 1400, now it's back down to seven hundred. There's probably a stabilized number between 750 and 950 over the next few years. It may bounce around a little bit. It's unlikely to go back over a thousand anytime soon. It almost certainly won't go under 500.

You may see a trade between 670 and 900 for the rest of this year, and then once you get to the end of the year, probably stabilize at like 800 to 850 per thousand board feet.

What does that do for you as a builder? Well, whatever your lumber costs were for projects in 2018, 2019 and older, maybe add 40, 50, maybe a little more percent to that lumber cost.

What about materials? Well, paint, adhesives, fasteners, tools, roofing, appliances, cabinetry, trim work—all those are going to be up at least the same amount.

So bottom line is this: whatever you factor in as your cost basis for your job, if you take that number from a prior year—from 2016, 17, 18, whatever it was for the same job—and you multiply it times 160 percent (1.6), you'll have a pretty good estimate of what your cost basis will be for future jobs.

And that goes for labor too because even if your actual labor cost isn't 60 percent higher, you're going to find that work comp insurance, other types of insurances, and taxes are going to fill in the difference to get you to a 60 percent price hike.

If you can factor that into your current pricing, you'll find that most end users—the buyer of a house, the client for a remodel, client for an addition—it's going to fit in line. No one's going to like paying more but it will still be an acceptable amount.

Just make sure you don't underprice your project or you're not able to complete the task or have to go back to your client, ask for more money, or cut corners on part of the contract requirements that maybe you try to slide under the rug—that kind that the client doesn't see it.

Don't do that either because that'll come back to bite you.

Let us know what you think in the comments.