In last month’s Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index), I wrote the following:"My cracked crystal ball still shows higher prices and volatility. Builders should include a price escalation clause in their contracts to protect them for periods later in the year.” I certainly hope builders and contractors heeded my advice because the commodity and building material markets over the last few weeks have shot straight up. As of mid-February 2017, the Index surged to $32,321.40, which is a whopping 3.1 percent increase in just one month and also a record high for the Index, which started in April 2005 during the construction boom. To put it in perspective, the price of materials to build a home since the Great Housing Boom has increased 24.7 percent. Since February 2016, the price has increased 9.7 percent. A builder trying to eat these huge increases will probably not stay in business. Plus most subcontractors and suppliers do not have the financial wherewithal to absorb these huge price increases. Since last year, the cost of basic building materials to build a 2,200 square foot home referenced in this Index has increased $2,859.07. This amount doesn’t include the huge increases in labor and workers’ compensation rates in Florida. It also doesn’t include the price increases for electrical, plumbing, HVAC, and décor, which are not part of the Index. The reason I am emphasizing these price increases is because I know from my company’s weekly credit reviews that many smaller builders and subcontractors cannot financially survive this type of pricing volatility without passing the cost along to the end-user. Builders and subcontractors must get in front of these increases. The price increases in lumber are primarily tied to the fear of huge countervailing duties or tariffs being placed on imported Canadian wood, with the expiration of the Canada-United States Softwood Lumber Agreement. Duties on imports to America could be as much as 25 percent, with a decision appearing to be more likely coming in late spring. However, many fear there will be a clawback provision making the duty retroactive up to 90 days. This is forcing mills to rethink shipments this spring to the United States at low prices. This market increase is being pushed by a mild winter in the northern areas that is early peeking demand for many building products. Plus a persistent shortage of skilled labor is driving labor costs up. Just-in-time inventories as well as weakened balance sheets in the supply chain provide less flexibility for manufacturers and suppliers to eat cost increases. Listed below are the major price movers in the Index since mid-January:
This is one heck of a list—not one item in the Index dropped in price.What does the future hold for pricing? Here are my concerns. The politics in Washington, D.C. must settle down or this chaos could possibly push the country into a recession. Business needs clarity to grow and expand. The mild northern winter could be causing an early peek in business. In recent years, the increased demand in housing ran out in late spring, as typical winter backlogs were built early. I am not convinced these lumber increases have the legs to go through the summer without any countervailing duties, but who knows? A big “pop” in pricing like this could easily exacerbate an already bad labor situation. Framing subcontractors who do “turn-key” projects probably do not have the financial wherewithal to survive these types of increases. Builders could lose subcontractors who just throw in the towel. At some point, the cost of housing crosses an affordability line that hurts the industry. I do believe that at some point the new homebuyer will cry uncle. Finally, uncertainty is throttling business. Threats of tariffs, duties, and busted trading partners from around the world are not good for business. These issues need to be resolved quickly or the volatility will persist. My best guess is that mills and manufacturers will test these new price levels through mid-March, and if demand holds up most of them will be cemented. Lumber pricing truly depends on the Canada-United States Softwood Lumber Agreement. If the negotiations get ugly, expect higher lumber pricing to remain until housing turns down. The ugly truth is that we are still in a volatile market, which is being hit with cost increases from all sides, so expect inflation.My advice remains the same as it did in January—read the first paragraph of this report. The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index is based on wholesale costs of the base components to build a 2,200 square foot wood frame home with a concrete stem wall in Central Florida. The Index includes foundation, metal, concrete, block, stucco, cement, wood framing, siding, sheathings, trusses, roofing, drywall, insulation, windows, doors, trim, garage doors, and most building hardware. It does not include décor, electrical, plumbing, mechanical, landscaping, or labor. Because the Index uses current wholesale costs, this should be a strong indicator of the direction of building prices for the next 30-45 days.
Magruder is the Chief Executive Officer of Ro-Mac Lumber & Supply, Inc. in Central Florida. Go to www.romaclumber.com to sign-up for the Index and other free market reports. To sign-up for this information via email, contact Rebecca Ballash at