The Expert Podcast

So we've been all watching lumber prices for the last month or two and they've been down quite a bit almost 50 percent reduction in lumber prices and a lot of what's on everybody's mind is what does that mean for the building industry what's going to happen in the future and whether you are a general contractor whether you work for a contractor maybe you're a homeowner that wants to do a renovation project let's take a look at the metrics of what has been happening and what is expected to happen in the future and what might kind of be hidden behind the scenes.
First of all what's behind all this well interest rates have gone up and home prices have gone up that being said some builders are starting to put a little bit of a pause on doing large scale subdivision developments we're seeing that in all the markets that we keep an eye on where some builders are slowing down the process however it doesn't change the fact that people want to be homeowners right people want to be an owner of where they live not a renter of where they live and over the last two three years it's been very difficult to become a homeowner first of all there was no inventory people had difficulty even buying a house at any price and then the prices went up to where houses that were 250 300 were now 500 550.
And how did that affect buyers well they cried half of u.s home buyers are crying during the process in a survey 65 percent of gen z home buyers are brought to tears during their house hunts and as on the seller side 60 percent of sellers reporting getting at least two offers on their homes and this was just last month this is april so this is not old news from 2021 people want to buy houses and even those in the real estate industry you know you've all heard of barbara corcoran on shark tank big real estate retail company owner says you have to get in the game you have to get in whatever house you can buy so you have a chip to play in the game and trade up and trade up and that's true that's why people want to be homeowners.
And if you think about it even if there's a slight pause in the construction and real estate market right now it's really just buyers and sellers catching their breath and builders the prices zoomed up so fast the interest rates went up so fast it does not change the number of people who want to buy a home you just have to absorb and get used to the higher price point either get used to a higher price point or get used to a lower house point that's what i think is happening people are starting to look at well maybe i should get a cheaper house maybe you won't have granite countertops marble floors all of the upgrades that go into a higher end home.
In fact some builders have stopped doing pre-sales they're building just on spec because they know it's going to sell in fact if you do a contract today for a certain amount let's say 350 for a house by the time it's done six or eight months later first of all you might find that your cost basis for materials labor appliances subcontractors have gone up so much that your cost basis means you have to now sell it for 400 to make a profit so instead of being faced with that and having to cancel the contract with their buyer many builders such as going to spec homes and spec homes used to be a dirty word because you didn't want to have your money on speculation you want to have a deal done on that house but now it's really you have nothing to lose as a builder in fact everything to gain because you don't have to customize the house to the whim of the buyer you can build it to whatever builder grade you want you can build it using materials you know you can get.
Look if the customer wants a certain color of you know black and stainless steel for their appliances and they're out of stock or a certain type of garage door and you can't get it now you can't close out that home until that item is in stock but if you can build it with the windows and doors and things you know you can get from your supplier or your lumber house now you can finish that home it's a brand new house person's going to buy it anyway and you know what your cost basis is when you price it with lumber prices as volatile as they are sometimes you don't know what your cost basis will be until you're done until you swing the last nail put the last coat of paint so pre-sales may be a thing of the past for homes although for cars it's going to be the only way to buy afterwards.
What about inflation and we'll get to lumber prices in a minute well investors might be in for root supplies history shows inflation can take years to return to normal even when the fed hikes interest rates above 10 percent so this is a premonition about interest rates and inflation it says that we might see interest rates at 10 for mortgages we've talked about that in other videos even on some of our other channels that we expect single family home 30 year mortgage rates will be at 10 within 24 months by the end of 2024 you'll see interest rates at double digits for single-family homes now that it's going to affect the mortgage payment cost for many buyers it may also affect the sales rate meaning that how many houses are sold it probably won't affect the price the prices of these homes will probably stay the same maybe drift up a little more they may not spike up 20 percent again but they're not going to go down.
Part of the reason is inventory will continue to shrink there will be a little bit of a flood of people looking to sell right now that we're holding off because they thought the market was going to go up they might see a little fear right now as interest rates rise thinking i better sell before the market goes down but once everybody sees the market's still not going to go down it'll be back to normal short inventory part of the reason is unless the person selling is selling a second home that they're not replacing it's very difficult to justify selling your house with a two or three or four percent mortgage when you know you're gonna have to buy a house and pay eight or nine or ten percent mortgage that new house better be just blow your doors in because you're gonna double your mortgage payment for the same house so many people are not going to look to sell.
What about lumber prices here we go lumber prices continue to splinter drop 47 percent since march 2-3 months about 700 bucks a foot or a thousand board feet and that's a big drop from the high it's still above the trading range that lumber's been in for the last lumber's been between three and five hundred dollars per thousand board feet for a decade plus even though it's down from its high of 1400 and change it's still at 700 from the high of 500 that's like a 40 increase so you can talk about a 47 drop all you want it's still 40 above where it has been for the last decade and this 695 we expect his short term it may drop down again towards 600 but within a year maybe by the end of this year it'll be back up in 8 900 range we've talked about that before why is that well because inflation doesn't go away this is a temporary thing where maybe builders are pulling back a little bit and some of the home renovations are slowing down because people are not sure what's going to happen next.
And here's the big elephant in the room for builders more of a factor than lumber prices labor workforce shortage in the construction industry you need 650 000 more people in the building industry right now construction industry will need to attract 650 000 additional workers on top of the normal pace of hiring to meet the demand for labor not enough people that can build houses they can do the trades and that also doesn't count the fact that there's some investment in jobs act and stimulus and infrastructure governmental forces coming in to even add more pressure on the building industry and this is a time when many people are getting out of the building industry.
Concern decline of the number of construction workers aged 25 to 54 which fell eight percent see these are the people that should be coming into the business that will fill up in the next couple years it fell eight percent this should go up older workers exiting the workforce well that's going to happen it gets harder to do you get sore bad back those kind of things the 650 000. 650 000 workers must quickly acquire specialized skills that's the other problem you don't just walk in to the construction industry and know what you're doing you have to acquire skills and that takes time and the workforce mentality right now is you don't want to take time to learn something you if you don't learn it right away you're going to quit it's a very very serious problem bigger than the than the lumber problem because the lumber problem goes up and down this is a permanent thing.
So tell us what you think in the comments is this something that you are aware of is it something that you see in your industry something you see as a a home builder maybe you're a consumer that is looking to add on to your house or remodel your house maybe you're looking to get into the construction industry put your comments below let us know what you think the home building economy is going through an upheaval and not in a way that's going to cut costs actually costs are probably going to go up which no matter how you slice it will bake itself into the price of a new house for years to come.