ARE LUMBER PRICES KILLING THE HOUSING MARKET?
January starts and permits are out, and we’re off to a good start. Total U.S. starts were 1,326,000 (annualized), up 7.3% YoY. Maybe equally important, the numbers were oddly consistent: Starts and permits, both single- and multifamily, were all up between 7% and 7.5% YoY. It’s rare to see all four growing at the same rate. Maybe that’s a sign of a healthy housing market. Builders seem to think so, anyway.
The NAHB-Wells Fargo Housing Market Index held steady at 72 in February. This is the third consecutive month over 70, which hasn’t happened since July 2005. In fact, the market looks so rosy that it took NAHB chief economist Rob Dietz to ﬁnd the cloud in the silver lining.
“DEMAND CONDITIONS ARE POSITIVE, BUT SUPPLY-SIDE CONSTRUCTION HURDLES NEED TO BE MANAGED, AS SCARCE LABOR AND BUILDING MATERIAL PRICE INCREASES REMAIN TOP CONCERNS.”
So far in Feb., Random Lengths’ framing lumber composite is up 27% YoY while the structural panel composite is up 34%. Even home buyers are starting to notice. Last week a dealer friend contacted me to get my take on how I’d answer a question he had gotten from a realtor. She told him prospective buyers are backing away, thinking that if they wait until framing materials come down, home prices will, too. She wanted to know what she should tell them. She should tell them they’re stepping over dollars to pick up pennies. Framing materials make up 8% to 9% of the dollar value of a single-family building permit. Permit value doesn’t include land or site development costs, so depending on where you are, lumber and panels may be no more than 5% to 7% of the selling price of a home.
Not to say that’s insigniﬁcant. If framing accounts for 6% of the selling price of a $300,000 home, a 30% increase adds $5,400. If all of that gets passed on, it boosts the selling price by 1.8%. With a 20% down payment and a 4% interest rate, your monthly mortgage payment would jump by—wait for it—about $20.
But only in theory; in reality, home prices don’t correlate to material costs. In four of the eight years since 2009, the average annual framing lumber composite rose at least twice as much as home prices. In three of those years, home prices rose while lumber prices fell. Only once did both framing lumber and home prices rise at the same rate: +4.6% in 2016.
Random Lengths’ composite prices have little or nothing to do with home prices. If potential buyers are getting priced out of the market, there is just one reason: We’re not building enough new homes. Household growth is back to normal: 1,320,000 formations in 2015, according to the Harvard Joint Center for Housing Studies. Throw in tear downs and second homes, and that translates into a need for 1.5 to 1.6 million new housing units per year. In 2017 we built 1,202,000 units. That’s a 20% shortfall. Builders in multiple markets—e.g., Denver, Atlanta, or Detroit—have had to cut back on production for lack of framers to build shells. Framers are in short supply because nobody wants to be one. And for good reason: Way too many home builders have spent way too many years treating everyone who does the actual building as “supply-side construction hurdles” that “need to be managed,” usually by squeezing their proﬁts.
Those who understand that the real savings are in a coordinated effort to reduce wasted time, wasted material, and mistakes—whether it be savvy builders, dealers providing turnkey labor and materials, or offsite fabricators—are likely to have a big leg up in attracting the journeymen we need to get to 1,500,000 starts.