On today’s show we are taking a look at what is happening with construction materials and how this might affect construction projects that you have in your current plans for this year.
In the past two months we have seen lumber prices fall from their peak in March of $1,450 per 1,000 board feet to a new low of $667 per 1,000 board feet. Prices had dropped in April and then jumped back up to approximately $1,000 per 1,000 board feet in anticipation of the increased construction activity of the spring and summer.
The drop in prices is coming from a number of factors on the demand side of the equation.
New home sales are down across both the US and Canada. But the decline in housing starts is only 0.2%. That is not enough to cause a substantial impact on lumber prices. The major sell off in shares of national home builders like DR Horton and Lennar reflect an expectation that the combination of rising interest rates and rising construction costs will reduce demand for new homes.
Some builders have stockpiled materials in order to secure supply and as spot prices fall they will want to consume their own more expensive inventory and buy new inventory when the low priced material works it’s way through the supply chain.
I’ve had several discussions with contractors who have experienced massive scheduling problems as a result of material shortages of all kinds. The common lament is that they get booked for a job only to arrive onsite and experience material shortages. The sub trades are then left with no work instead of having too much work. Large scale projects are generally optimized to maximize the efficiency of the scarce resource which is human labor. But when the scarce resource is material and changes from one week to the next, it can cause delays all over the construction project. Scheduling of trades in this environment has become much more difficult and it’s common for a construction site to sit idle for weeks at a time.
If the foundation is done and you have the wood and the framing crew, you should be good to go. You might be tempted to think that you should be able to make forward progress on structural framing, but that is not the case. Let’s imagine for a moment that the scarce resource is roof trusses. If you are going to wait 12 weeks to get roof trusses, you have to wait to start framing your structure until you can take delivery of the roofing structure. You can’t leave a partially framed structure exposed to the weather for months. It will suffer damage from wind and rain and will not meet the specifications when you are done. You then face the more expensive demolition and rework.
Even if housing starts don’t drop at all, supply chain constraints elsewhere in the process are slowing the entire construction process, making it much less efficient than in the past. That inefficiency translates into a fall in demand for materials because houses and apartments are taking longer to build.
My prediction is that we will continue to see lumber prices fall over the summer months. Some general contractors are fully booked for 2022, and are accepting large scale projects for 2023. But then others are recognizing the inefficiencies inherent in the current situation and are willing to accept new projects on very short notice as gap fillers.
Host: Victor Menasce