Timber prices are falling rapidly, but construction costs remain high
Lumber prices have fallen like a rock in recent weeks after record months, but builders are still waiting to see the benefits of the drop. Meanwhile, new home prices continue to rise.
The high price of lumber has long been cited as one of the main factors driving house prices up over the past year, and also the reason why there are not enough new homes to meet. on demand. However, lumber prices have fallen about 50% over the past seven weeks, giving hope that the cost of a new home will also drop.
But that didn’t happen because builders say they always pay much higher prices for their lumber.
Write in the National Association of Home Builders Housing Eye Blog this week, NAHB economist David Logan explained that this disconnect has always been present in the lumber supply chain and that it will take time for lower costs to reach builders.
“As the price cuts started to grab the headlines, the price of lumber packages offered to builders hit record levels,” Logan wrote. “This dynamic is primarily due to the costs of holding dealer inventory and the potentially large differences between the price at which inventory is bought and sold.”
Logan explained that there are five stages in the lumber supply chain. It all starts in the forest, then moves on to the sawmill. From there it goes to the wholesaler, who transfers it to the retailer, and then, finally, to the end user (builders).
In order to ensure that their profit margins are healthy, retailers and wholesalers will always try to buy their lumber at a low price and sell it at a higher price, but Logan explains that this is a delicate balance that involves many risks in today’s environment where prices are falling rapidly. For example, if a lumber yard quoted a customer at market price two weeks ago and then only delivered on that order today, it would sell at a 25% loss from current prices. Therefore, suppliers who quote market prices will lose money when the value of lumber tends to fall, Logan said.
Another factor is that supplier stocks are generally tight during times when prices are falling, the economist explained. This is because the inventory they have was expensive compared to the current market price. Thus, both the wholesaler and the retailer have an incentive to sell their entire inventory while they can still get a price close to what they paid, without disturbing their customers too much, he said.
“And for the reasons stated above, they will be ‘timid’ to buy more lumber than they are contractually obligated to supply to customers for fear of ending up with a load of inventory on which they will suffer a loss,” Logan continued.
As to when manufacturers will finally see some price relief, it’s hard to say. Logan said builders would only get lower prices after the cost of lumber has declined for an extended period or if the price stabilizes. Large price reductions are not sufficient on their own, as they must fall for a period long enough to bring down the supplier’s average costs as a result of the previous price increase. Otherwise, wholesalers will find it too risky to sell at a discount.
“Depending on the rate and consistency of the price drops and if prices have stabilized at a lower level, it may take a few weeks to a few months for manufacturers to see price relief on the order initially reported on the futures markets. or cash. ”Logan said.
Other factors also come into play. For example, large construction companies that order larger quantities of lumber will undoubtedly see the first prices reduced. Personal relationships between builders and suppliers can also be a factor, Logan said.
“Homebuilding is an industry that relies heavily on relationships with customers and suppliers,” continued Logan. “The length and quality of a builder-supplier relationship can have a positive impact on how quickly the builder is offered lower lumber prices. “
While builders say they are patiently waiting to be offered these lower lumber prices, the cost of a new home continues to rise. At the end of May, the median price for a new home was $ 374,400, up 18% from a year ago.