The Expert Podcast

So the big question is what's going to happen with lumber prices. It's been up and down all over the map, it's been in the news. As a licensed general contractor, we have to deal with this every day and make predictions based on what the lumber prices are going to do, but also what's reality for today. So here is a five-year chart of lumber prices. Look, for many years before it always traded in a narrow range, you know, between the 200 and maybe 500 range. It was some spikes, you know, back in 2018, it spiked up a little bit.

But mostly it's very stable and constant. And then about two years ago is when the big march forward happened. You know, June of 2020 it started its way up and the first time it was at about a thousand was maybe a year and a half ago, September of 2020. And then it dropped. People get scared psychologically, look at the number where it pinches off, hits a thousand, people see, "Oh this has four digits in the price," and it goes down. Remember, we're talking about dollars per thousand board feet on this quote.

Then it drops down, finds some support at 500 again. It's psychological, 500 is a round number, and then it starts marching back up, right? And you get a peak and then it goes back down. Where does it bottom out again? 500. So it's found a new floor support level at or about 500. Marches up again, and this is over the course of two years. You get to 1500 again, that's a psychological number where people get scared, and it bops back down. Today, down under 700 again. But what does this mean? We're never gonna go back to two or three or five hundred dollar lumber prices.

The support level is at least at 500 and the market and builders and clients have learned that prices at about the thousand dollar range are doable. People build houses paying a thousand bucks for lumber for a thousand board feet, and builders were able to construct houses. The housing market for new homes was able to absorb that price point. Many of the houses built within the last year, new homes were built with lumber 800, 900 bucks, and they're getting sold and there's a shortage. New homes get sold, snapped up instantly.

In fact, proof of the support of that price level is many new subdivisions are being bought up by investors. There was an article last week where an investment company went to a builder that built in Central Florida, 45 homes in a subdivision. They said, "Look, don't put them on the market with a realtor to sell them one at a time. We'll buy the whole thing." And the cost basis for that subdivision was 880 for lumber, and the investor bought it, and they're going to make money with it.

You're going to see these ups and downs, this volatility, but you're not going to see a reversion back to this level. You're going to see a new norm, probably between 750 and 1100. You may not see 1500 or 1800 lumber anytime soon, but once it stabilizes, you'll see a lumber equilibrium, you know, between 750 maybe 1100. When it gets over a thousand, people might get scared again, but it's not going to go back down to this three to four hundred dollar range because builders and buyers and home remodelers have already factored in that's the price into their bids and quotes.

And quite frankly, the market has accepted it as a new norm. In the same way that house prices have gone up dramatically and that's now accepted by the market, this price for lumber is now what people expect as a final result. Look, the person who is remodeling their home or putting an addition or buying a new home, they don't care what the price of lumber is. They care what the final price of their house is.

Lumber represents maybe a third to 40 percent of the cost basis of a new home. You have labor that represents a third, and then you have fixed expenses: land, site work, permits, that represents about a third, roughly, depends on the market. There may be, you know, forty percent here, thirty percent there. So the lumber inflation, if lumber goes up 20 percent, it really only adds seven percent or a third to the price of a home. That's already been baked into the market.

Home prices are up 40, 50 percent. So even the other increases in the labor cost, which are higher, maybe 40 percent higher in labor cost, so you have a 20 percent component there, you have maybe a five percent component on the fixed expense side. So by the time you add those up, it maybe is a thirty percent increase in the price of the finished product, the deliverable, the new home, the remodel, the addition. And that's acceptable.

Most people figure it's 30 percent higher, 40 percent. You know, if I did an addition that was, you know, 200 grand two and a half years ago, it's going to cost me 250 now, right? 25, 30 percent more, maybe 260. Without land, if I'm buying a new house or building a new house, it might have cost me 300 two and a half years ago, it's going to cost me 400 now. That's on par with the market for real estate.

So these lumber prices in the seven, eight, nine hundred dollar price point is not going to affect the market that much. The bigger problem is going to be availability, not so much of lumber but of fixtures, appliances, trim, even copper for wires and for plumbing. And the other problem is going to be labor cost and availability. Subcontractors, you know, they're booked. Good ones are.

So if you're looking to build, the biggest problem for the GC is finding your subs, putting together a build schedule, more so than bumping the price of the finished product by twenty or thirty thousand. Most larger projects, if it's twenty or thirty thousand more than what it was two years ago, that's going to be nothing to the buyer.

In fact, cars — most people that buy cars are now paying ten thousand more for a car than they did two years ago, and it's not slowing down the car market. Go by a dealership in your area, there's no cars on the lot. And the same car that you buy today for, let's say, forty-eight thousand dollars, two years ago cost thirty-five or thirty-six.

So if a car can go up ten thousand, a remodel can go up twenty-five or thirty thousand, no problem. And a new house can go up eighty or ninety thousand or a hundred thousand, no problem, because people expect it. Look, gas prices are double. People know the prices are higher.

This component of lumber doesn't make a huge dent in the house, makes a little bit, but it's not the biggest factor that people are looking at. Because of that, these lumber prices are the norm. This little dip right here, even at the end of 2021, was actually more about availability of particular lines of lumber, types of goods, than it was the market.

During this time, much of the lumber that would have been at a higher price point wasn't even available because of the floods and the storms in British Columbia and supply chain. Were there more availability of the higher priced lumber, this would have been higher too. This was a blip. This is the real market.

If you actually drew a line from June of '21 until November, that six month period, and kind of kept it more even, this is your range for lumber. This is what we're seeing. And it's not the lumber yard itself that's marking up as much.

In fact, we have a lumberyard here we deal with, and the guy there wants to get out of business. He's put his lumber yard up for sale because he's not really making that much more money and his costs are higher. Right, if you have, you know, maybe, you know, on a stick you have a five dollar stick of lumber. If you make a buck or make 50 cents, whatever it is, now if that stick of lumber is eight dollars or nine dollars, you make the same dollar markup.

Your percentage margin is lower. Instead of a twenty percent margin, now you have an eight or ten percent margin. And you still have the same overhead, you still have the same rent, electricity, employees, labor, taxes, all your expenses, and have a smaller margin.

So the lumber yards themselves are being squeezed. They can't hold as much inventory either, because lumber yards, they have to have cash sitting in their inventory. You might have four or five hundred thousand dollars worth of inventory sitting in your lumber yard, or a million dollars if you're a big, big yard. And if the lumber price goes up thirty percent, now all of a sudden you need an extra 200 grand in cash to fill your yard. And if you don't have it, people are going to go somewhere else.

So it's not the lumber yard itself that's benefiting from this. Really nobody is. The costs all around are going up. Even the producers, the mills, the forestry companies, they're maybe achieving a little bit more gross profit, but their costs are higher too — for insurance, for labor, trucking.

All this lumber has to come on a truck. What's diesel cost now? Six bucks, right? All that has an effect. None of that's going away. The diesel price is going to be higher. Employment's going to be higher. Taxes are going to be higher. Insurance is through the roof. That's going to keep these numbers high.

So if you're a builder looking at these numbers, knowing what to expect, plan on 7, 800 bucks for a strike price. If you're a home remodeler as a client, expect the numbers are going to be where they are now. They're not going to go down.

If you're looking to build a new home, actually you're in the best position to be in because right now building a new home is actually appealing compared to buying an existing home because you can take out some of the markup if you self-build, even if you hire a contractor to help organize some of it.

So a lot going on in the marketplace. Don't let this type of graph throw you that it's that big of a deal or even don't let it throw you that the strike price went down below 700 today. That means nothing. It doesn't mean it's going to be back down here in the three to four hundred dollar range.

You know, round it off, you're at a thousand bucks. Is it going to be a little less than that? Probably. Most of the time it'll probably be seven, eight hundred bucks. But over the next year or two, this will be the new norm. Five to six hundred will be your floor, and it'll have spikes up from there.

It'll get more to an even distribution like it was for the last 10 years. But once all this craziness gets worked out of the system, you're going to be back to that 7, 800 range as a floor, maybe bump up to a thousand two or three times a year, and then that'll be your new norm.

Inflation's not going away because all of the things that go into producing the materials are permanently ratcheted up — fuel, labor cost, insurance, even the cost of the lumber yards and the forest leases. That's kind of a fixed cost, but the new renewals of leases and the replanting of trees is all going to be higher too.

Take it for what it's worth, put your comments below, let us know what you think, and we'll see you in the next video.