The Expert Podcast

So lumber prices have gone down in the last week or two so does this mean that real estate development building and contracting is back to normal and the prices will be more palatable let's take a look as you can see from the chart lumber prices have gone down back under the one thousand dollar mark and that's a measurement of dollars per thousand board feet um it was up in thirteen fourteen 1400 range at one point it hit um 1700 1600 back in 2021 as you can see the level that it's at today which is you know mid april 2022 is same as the price point that existed at the end of 21 so that's a few months ago but as you also notice it had dropped down to that level the beginning of the year the end of january so this drop may represent some savings for clients contractors builders that are looking at projects in the next month or two but as you can see the volatility it may not be a permanent resting place for the price even if it is the lumber cost component for a large commercial project may not be enough of a motivating factor to really change how a client or a general contractor is going to look at a project.

Let's take a look at what that might mean so if you have a lumber project let's say that's a 35 or 40 000 build package in your lumber quote from your supplier let's call it 40 000. well if the price point goes down from let's say 1200 to 900 that's going to reduce your lumber cost maybe down to thirty thousand instead of forty thousand now ten thousand dollars is real money it's not anything to sneeze at but that same job might now have an increased labor cost of seven or eight thousand so it's going to be an even wash in addition when you're pricing out that job today you're going to look at this chart and say well if i get my lumber quote today and i get my permits i get my approvals from the client i have my site work done and i go to buy the lumber package and it's back up to 1200 that's going to be my price point.

So the builder or contractor or even home owner client has two options either you buy your lumber today and store it on site or you price your job at an average from the last six months and if you're going to do that you're going to be at the 11 to 1200 point anyways so the lumber price spot price today is lower than a few weeks ago but it's still higher than it was three months ago it's about the same as it was two months ago it's great to see lumber down at this level but a deeper dive will show us that it may not be all it's cracked up to be.

Part of the reason for the lumber price reduction is that there are still supply chain bottlenecks meaning that people can't get their lumber so when you don't have that high volume of transaction points you're going to have lower demand and the price will go down people aren't ordering more because they already are behind on what they've ordered before so if you have a lumber package that you've ordered that hasn't arrived yet you may not be able to purchase the next batch that you need and that could affect the price this drop under a thousand may be an artificial demand reduction because of the supply chain holding back the availability for lumber yards supply houses even di wires you're finding people going into the major big box lumber stores the blue one and the orange one and seeing the lumber prices higher and maybe buying less than what they would have before maybe not having the availability of certain items.

We're already seeing in some local supply houses certain types of goods aren't as easily available you know maybe two by ten pressure treated are out of stock maybe certain lengths of goods maybe 16 foot goods are out of stock when those items are not available the other part of the package might not be purchased if you know you need you know 2 by 10 16 foot goods and you can't get those the rest of your standard lumber two by fours or two by sixes or other materials you might not buy because you can't do that project now anyways you might have to wait for those items.

At the same time the other cost components of a major construction project a remodel an addition even a new home construction are dependent upon the labor availability and right now even though the economy is starting to pop and there's fewer lockdowns and more activity in the building realm in addition to the time of year you know now that you're into april most of the country can now do more construction because you're out of the doldrums of winter even with all that the building pace may be less robust because of the availability of labor and a lot of that comes as a self-fulfilling prophecy as you do more projects the labor gets spread thinner as more people are finding careers outside of their previous construction workforce there's also less availability for the contract company.

And also beware with lumber prices seeing that drop below a thousand that is counter intuitive or contra indicating for the overall inflationary price points gas is still up food is still up vehicles are still up prices of homes are still higher the fact that lumber has blipped down doesn't necessarily mean it's a permanent state of the price point in fact it's probably a little bit of a mini micro adjustment to the price because of inflation in other areas people are making adjustments and what will happen in the long run is if the volume of lumber purchasing is reduced because of you can't build houses fast enough there's no labor or the permitting process is slowed down the lumber producers might actually have to raise prices to cover their fixed expenses cover their basic overhead you know if you're producing you know a million board feet a month and you can divide your fixed expenses your equipment your mortgage your property carrying costs your payroll over that volume you can sell at a certain price if your volume now goes down to 600 000 board feet a month as a producer or a wholesaler whatever your role in the supply chain is you might have to actually raise your margin to cover those fixed expenses.

In addition a hidden or invisible problem with the development process is permitting there are serious budget and workforce constraints on the public sector permitting industry meaning that the permit offices the land used offices the inspectors all of the municipal government agencies that go into a building project whether it's the initial zoning review the plans analysis the permitting approvals the inspections the final cos all those require government employees to process that we're seeing in many jurisdictions many of the counties around the country that the staffing is at a very low level and the permits are getting backed up to where instead of a one or two or three week turnaround it's two or three months turn around in places where it used to be quick you know some parts of the country california is a good example the permitting process sometimes you have to plan for a year to get your permit but in other parts of the country like texas you can get permits turned around in many counties in a couple weeks with the workforce reduction even some residual lockdown or corona effects holding back the procedures in a government office.

Now if you have to wait three months for a permit approval you can't order your lumber package so you have to factor in to your price whatever price point you can imagine will be in place three months from now look before 2019 you could pretty much predict what the lumber was going to cost in three months there was some volatility but it was very minor the change in price and you could factor that in to almost any bid project with the volatility that has existed now you almost have to figure worst case scenario for your lumber package because even if your permit is a month away month and a half away well you can see from that chart what can happen in a month it can go from 900 to 1200 back down to 900 and anywhere in between it's like the roulette wheel you don't know where it's going to stop when it's time to order your lumber package and you also have to factor in a little bit more time because at the time at the moment that your permits approved now you have to put together your workforce to start working on your project and juggling that workforce with other jobs maybe they're working for other companies is also less predictable or fewer people in the workforce to begin with.

So this lumber price reduction is a good thing if you can catch it at the right time but the volatility in that range that trading range of lumber you know dollars per thousand board feet is so wide that as a builder you either have to buy the lumber now and store it or you have to plan on the worst possible scenario for that price because you might not be buying it for a month or two or three in some cases now what about storing lumber you know this is an interesting arbitrage type strategy and some homeowners some builders are looking at this strategy saying look let's buy the package or most of it while the price is low there may be some things you still have to buy you know filler items or you know upgrade items at a later date but if you can buy it now when you see the price point down at 900 or 800 or under a thousand maybe that's a strategy to save you ten thousand fifteen thousand on the lumber cost but it also introduces a couple other factors.

First you have to have a place to store it and if your job site has a location where you can put that kind of lumber that's great but once you've decided to do that and stored it you have a couple risk factors now you have pilferage or shrinkage you know that lumber can disappear because it's so valuable if it's sitting out there for weeks and months at a time someone's going to notice and you may have theft or you know people trying to find ways to get some of your lumber package in addition you also have the risk of damage you know a truck backs into it forklift backs into it maybe it gets ruined because of weather maybe the bottom layer is too close to the mud and and that's unusable.

The last thing is to look at insurance most insurance coverage for commercial construction or your homeowner policy has coverage for materials but there's certain limits it has to be within a certain distance of the job site sometimes 50 feet 100 feet and if your lumber storage is technically outside of the coverage zone you might not have insurance so if there's a fire if there's a tree that falls on it you may not have covered so if you are going to decide to store materials because of price arbitrage you're trying to get in on a lower price make sure that you're reviewing your commercial policy for your insurance to make sure you still have coverage and you know make sure you check your inventory when the materials are delivered a lot of times on an active job site you're going to check your your stick count to make sure that it's correct if it's stored for a long period of time you might not have the urgency to check it right then but make sure that your lumber volume is verified that it's correct and then you know tarp it up you know tie it down make sure that it's protected ideally wouldn't be visible from the public from the road but that's just one strategy.

There's risk involved but if you're talking 20 or 30 percent reduction in cost it might be worth looking into there's also the risk that the price when you go to buy it could be less if you buy it at 950 you know in three months it could be down to 880 and you could have purchased it cheaper it's unlikely if you're buying it at the lower point of the trading range from the last few months it's unlikely but you could go all through that trouble of storage and um securing and insurance and find out that it wasn't that much cheaper and at the same time when the lumber is going to be used there may be changes in your design or changes in what the permit required so you may have to buy some other lumber anyways and adding that small package could be an expense so you have to look at the trade-offs for purchasing ahead and it may not be practical it's not a very common thing to store it that long and it may not be practical.

Just remember inflation overall in the marketplace is still going up so if you see this drop in lumber it may not be a permanent thing and for a builder doing new home construction for a building company or if you're a general contractor doing jobs for private residences this may not be something you can count on for a future purchase if you're a home home owner that's doing a diy project or having a builder do a small project this may be an opportunity to buy the lumber if you don't need a long lead time on permitting or if it's a non-permitted project maybe it's a deck or some type of enclosure that doesn't need permits where you can just buy on the spot price at the you know drop of a hat but look at those opportunities to maybe save some money and then those smaller projects the savings might not be that great you know instead of you know 3000 it might be 2200 for lumber so you you can save 800 and that might be extra money you can put into other things in the project or make a project doable where if you have a budget of 2000 and the lumber price put you up over that now's the time to go ahead and and do that addition because the overall real estate market is still on fire additions and upgrades to homes are more likely going to pay off in the future and that doesn't look like it's changing anytime soon.