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Increasing Wood Cost Hitting Home Construction Hard

Housing Bubble
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EDITOR NOTE: Hardly anybody follows the price of lumber futures, but if you did, you’d see lumber soaring far beyond any price level it's ever been. With COVID-19 disrupting the supply chain, tariffs on Canadian lumber imports, and high demand for houses, severe price inflation has already hit homebuilders, and soon, homebuyers.

Jim Marrano feels like he's been hit by a two-by-four – right in the wallet.

Business is booming at Marrano Homes, with demand for new homes remaining strong, despite the blow to the broader economy caused by the Covid-19 pandemic.  The builder is working on between 80 and 100 new homes.

But now, the company is being hammered by a surge in the price of one of their most important commodities: wood.

A combination of factors – led by reduced production and staffing at U.S. mills, the resurgence of Covid-19 in the Southeast and tariffs on Canadian lumber – has cut supplies so steeply that prices have spiked about 25% to 30% in the last couple of weeks. That is adding about $10,000 to the cost of every home Marrano is working on.

And since these are homes that were already under contract, Marrano can't go back to the buyers and raise prices – which means the builder is facing as much as $1 million in extra costs.

"That’s a tough pill to swallow. The margins aren’t that big to begin with," said Marrano, executive vice president at the family-owned company. "Most builders would have to absorb this. Maybe down the road they make up, but there’s no way to go back."

Homebuilders are used to dealing with the fluctuations of market demand and the availability of materials, and they've learned over the years how to negotiate pricing, lock in supplies and manage routine changes. But this year they've been pummeled by factors outside of their control – from geopolitics and trade wars to a global pandemic that forced a shutdown of all business activity that still has not returned to normal.

The result has been tremendous uncertainty and unpredictability for builders.

"It’s very volatile. It’s creating a lot of havoc on builders," said Phil Nanula, president of Essex Homes of Western New York.

It's not just the wood, either. Other key products for new homes – from toilets, tubs and showers, to cabinets and electrical equipment, to roofing, siding, windows and flooring – have also been in short supply, as their manufacturing plants were affected by the same factors.

"Every day is a new adventure," Marrano said. "We're able to still build homes. It's just a lot of little stuff. We're constantly scrambling to back-track."

Now it is hitting the builder's bottom line – and it will eventually affect their customers in the coming months.

"We just had to have a price increase the beginning of the month, and a major part of the reason was the lumber," said David L. Capretto, president of Forbes-Capretto Homes.

Since early April, the price of lumber in North America has more than doubled, based on a composite index compiled by Random Lengths Publications, a Eugene, Ore.-based news service that follows the industry and tracks prices.

"It’s probably the worst I’ve ever seen in a short period of time," Nanula said. "Normally a customer is not affected by it, but this is unexpected to this degree."

And while that will eventually come back into balance, there’s no indication of that changing anytime soon, said Shawn Church, editor of Random Lengths.

“The market is at record highs right now, and climbing higher still,” he said. “We’ve not seen this kind of volatility in any kind of record run in the past. It’s hard to see anything that will stop it.”

So far, the most recent cost increases haven't been passed along to customers, because the builders already had contracts with them that locked in prices and did not include provisions to recoup additional expenses afterward. Typically, six to eight weeks can pass from the signing of a contract until a shovel hits the ground.

"By then, the lumber's jumped," Marrano said.

That means the builders have to absorb those costs now. For Marrano and Natale, that's about $5,000 to $10,000 per home, depending on the size of the house and the type of lumber. Nanula estimated Essex's extra costs at $10,000 to $14,000 per house.

But builders are starting to raise prices for any new contracts.

"Traditionally, we don't have discussions with customers about lumber," Nanula said. "But when overnight you get a price increase of $10,000 to $14,000, and you're not in a contract, we are having those conversations."

So what caused this?

Covid-19 and curtailed production. After a strong start to the year, Covid-19 hit in March, prompting the widespread lockdowns that shuttered the economy and created instability. The wood products industry was deemed essential – as was homebuilding in most states, except New York and a few others – but lumber mills cut production in anticipation of a dramatic decline in demand. Workers were laid off or furloughed, bringing staffing down sharply. So as supply fell, prices started to rise – and kept rising.

Unexpected high demand. Surprisingly, though, demand for lumber increased. So many people were stuck at home – whether working remotely or laid off – and unable to travel that they turned to fixing up their homes instead.

"It's created this unprecedented demand for the do-it-yourself or the over-your-shoulder trade," Church said.

Then homebuilding – which fell dramatically at first, in April – rebounded much more than expected, almost to the level of late 2019 and early 2020. In part, that was driven by record low mortgage rates, but homebuyers are also growing weary of the tight existing-homes market, where the lack of available houses for sale is creating heavy competition among homebuyers.

"That inventory level is driving more people to consider building," Nanula said. "You're not going to be in a bidding war. You're not competing against another person."

Lack of workers. Mills restarted their production and began to ramp up, but they've struggled to add shifts or get to full strength because they can't get enough workers. A major cause, officials say, is the extra $600 in unemployment benefits that the federal government provided U.S. workers through July. "That’s been a disincentive for them to go back to work," Church said. "There’s also some fear among people about going back to work, out of fear of contracting the disease."

And now, the Southeast – which is the largest lumber region, with the most production capacity – has been hard-hit by a second wave of Covid-19.

"They’ve had to temporarily shutter mills and because of employees being sick and that kind of thing," Church added.

Tariffs. Finally, the Trump administration more than doubled its tariffs on lumber imports from Canada to more than 20% during its trade wars with Canada and Mexico. With the new U.S.-Mexico-Canada Agreement, those tariffs were supposed to drop back to 8%, but that's been delayed until later this year. And Church said the devastation caused by the mountain pine beetle in the interior forests of British Columbia left that region short on timber resources.

As a result, wood prices soared, as measured by the Random Lengths index that measures the cost of wood for every thousand square feet of one-inch thick wood. The index – which had been as high as $428 in early March before bottoming at $348 on April 10 – finished this week at $743, up $68 in just one week.

Originally posted on The Buffalo News

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