Lumber Price Increases Nail Builders
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The CEO of a prominent lumberyard chain took me aside at the IBS to give me an advance warning: Lumber prices were going up, and builders won't be happy about it. About that time, lumber futures began to rise. Now, a month later, lumber prices are up 25%.
How could this be, given that so few homes are being built right now? Does it really just take a small uptick in demand to send prices spiraling upward? Is this the first and most conspicuous example of suppliers trying to recoup their profits after a long recession?
The lumber price increase, largely confined to framing packages, was all builders wanted to talk about at an industry meeting last night. No one had an answer for the increase. I suppose that if you really understood what was going on with lumber prices, you could probably make a fortune trading lumber futures. Some people no doubt already have. Their price is up about 25 percent this year.
In the meantime, though, builders lucky enough to have a contract to build a home are being asked to swallow a big premium over last year. The composite cost per thousand board feet of lumber has escalated from $251 on January 5th to $314 on February 12th, a 25% increase in a little over a month, according to Random Lengths. Lumber prices haven't been this high since the middle of 2008.
Forest product companies attribute the increase more to diminished supply than increased demand. Many mills were closed or mothballed during the housing recession. Now the industry doesn't have excess capacity to meet increased demand. Wholesalers cut back on their inventory, too. Now they need to restock.
Even so, this is the first big purchasing test for builders struggling to return to profitability or improve their margins. Steve Petruska, the COO of Pulte, said on a conference call last week that the company may be able to offset lumber price increases with some labor price decreases. "The labor market is pretty soft out there for framers," he said.
Builders who do their own take-offs, isolating lumber and labor costs, are in a better position to control their destiny. So are companies that make extensive use of trusses and panels that can reduce overall installed costs. And the search for new, optimized framing techniques must be ongoing.