On today’s show we’re talking about the shift in housing supply during the pandemic and what it means for new builders. Housing starts were up 12% for the year according to data just published by the research team at Fannie Mae. Multi-family starts are down 13.6% compared with a year ago. Total housing starts of all types were up 5.8%. Now through the year we had supply chain disruptions which meant that some items were difficult to source. Those hard to find items naturally went up in price.

Lumber is priced as a commodity and lumber futures trade on the commodities markets like many other commodities including copper, pork bellies, wheat, and energy. Softwood lumber is priced per 1,000 board feet. The math is pretty easy to work out. If lumber prices are at $1,000 per 1,000 board feet, you’re basically paying $1 per foot. The simple test is how much would an 8 foot long stud cost you to purchase? You might expect it to cost about $8-10, and that’s exactly what we see.

We’ve seen lumber prices fluctuate wildly throughout the year. Prices dropped to $264 at the end of March, and were up to $367 by the end of May. Once summer hit and we had a succession of hurricanes make landfall all over the country. Lumber prices hit $970 in mid September before dropping into the $500’s for most of the fall. Through Q4, prices rose into the $800’s and have remained around $850-$880 for most of January.

The impact of these high lumber prices, along with all the other supply chain shortages is that overall construction cost has increased about 10-12% in less than a year.

The price increase by itself would have made it difficult to start any new construction. The saving grace has been that the falling inventory has pushed prices up to the point where higher sale prices have made new housing starts viable. If prices hadn’t jumped an average of 11% across the nation for existing home sales, the market conditions would not support new construction. Fortunately for builders, prices do support the higher cost of construction.

But there is also an opportunity. It turns out that steel framing is less expensive than wood. Steel framing has commonly been used in commercial construction. It has the advantage that it doesn’t warp or shrink, or swell with humidity. It’s also very strong in compression when properly installed with drywall.

Some might be tempted to switch materials from wood framing to steel in certain applications. Sadly it’s not that simple. The carpenters who frame out of wood are not necessarily experts on how to frame out of steel. In addition, your architect would need to design the building to have the proper lineup of materials and cross sections.

What you might save in materials, you could easily lose in labor, complexity and rework if things are not done properly.

But if you’re looking to build cost effective housing, this could be an area to explore with your architectural team.

Unless you’ve been able to secure your materials or your subcontractors are willing to reconfirm and guarantee pricing, you might face a situation where a subcontractor walks off the job and refuses to honour their contract. You could sue them, but at the end of the day, you have a project to complete and a law suit won’t get the building finished on time and on budget.

2021 is turning out to be a year of value engineering, where the owner, the architect, and the general contractor will need to get creative about adapting to material shortages, price jumps, and optimizing your negotiations with subcontractors.