The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index) has been monitoring the wholesale cost of the building materials to construct a 2,200 square foot home since April 2005. In almost seven years, the highest cost month was October 2005 in the immediate aftermath of Hurricane Katrina when the Index reached $28,692.71. Amazingly, in the first two weeks of January 2013, the Index reached its second highest level of $28,519.91, which is downright spooky.
Prices have gotten so high that many buyers fear a correction is around the corner; so, conversely, most are buying “hand to mouth” just what they need. This in itself is exacerbating the markets. In my view, pricing in this market has three options:
At this point in the housing cycle, it appears there is a greater downward risk in pricing than upward. Such huge increases in pricing will subdue building activity and it appears in some markets, especially metal, cracks are starting to develop in the upward motion.
Here are some interesting notes about this month’s Index as compared to last month and also last year.
For the Year (Price Comparison Since Last January):
Also keep in mind that roofing manufacturers have announced another 10% to 13% increase in February. In Central Florida, cement contractors are being told to expect a $5 per yard increase in concrete and 8-cents increase in blocks. Then there are the fuel surcharge increases--the price at the pump is showing more pain lately.
The price increases in all areas of the building supply chain have been so great over the last 12 months that if a builder or dealer did not pass them to their customers then their ability to be an ongoing concern could be in question. It is very possible in the next few months there could be more closures of builders and dealers as accountants break the bad news of the negative affects these huge price increases had on balance sheets.
What is the direction and what is the proper play? My view is the market is over baked and at these levels I don’t mind eating “hand to mouth”, because if the markets start losing their steam and start dropping, it will be like trying to float a brick in a pond.
The risk if these market cost levels are now the new normal is simple--shortages if housing starts to boom, or if there is a bad natural disaster. I must admit, this warm spring could bode very badly for a strong spring tornado season.
How does a builder quote a project? Builders must price with a price protection clause and measured time the price is good in the contract. Do not price jobs banking on a future drop in price later in the spring.
We are in unchartered territory. This high of pricing during this time of year with housing starts less than one million and no looming hurricane is something I have never seen before. This is a time to be cautious.
The Ro-Mac Lumber 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.
Don 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
The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index) for December 2012 remained flat at $27,550.10, which is just a mere $9.83 above the huge increase of November. This big number for December runs counter to the conventional trends of the month. It appears the final Index of the year could be a launching point of a very inflationary period in 2013.
First and foremost, this December’s Index value is the highest in the history of this report. In December 2005, four months after Katrina, this Index was $27,390.90; today, it is about 1% more. Since last December, the Index has increased 9.7%--the analogy is simple--the cost to build a house rose almost 10% in 2012. That is a huge number and very inflationary.
The bad news is the inflation in building materials is not ending. According to Bloomberg Financial, lumber futures are at a six year high, which indicates lumber related products will cost more in 2013; however, there is a growing list of other manufacturers in building materials that have already announced price increases for the start of 2013.
The current list of price increases consists of the following product lines:
Drywall 30% Insulation 10% Metal Studs 10%
Roofing 10%-13% Insulation Board 5% Moulding 7%-10%
As most can figure out fairly quickly, this list covers most of the materials used in the entire house.
As far as the price changes in this month’s Index, movement was limited, as most manufacturers were pleased to hold onto November’s price increases.
In summary, the Index moved very little, but the big news is that it did not drop as it typically does during the month of December.
My strong suggestion for all builders is to watch long-term quotes going into next year, and be aware--as it looks now, the price of housing could go up another 10% in 2013.
Have a Merry Christmas and a Happy New Year. Thank you for reading our report and please feel free to share it with others.
The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index) for February 2013 hit a record high as sheathing prices soared and lumber prices edged up. There is an overall inflation aspect in the building supply market, which is being fueled by a supply chain that has been destroyed during the Great Recession, a lack of available credit and cash, and a buyer who is unwilling to bolster inventories during a period of record highs. The concern many have in the industry is whether these high prices will actually destroy the demand, because projects are now unaffordable or cannot get the proper appraisal.
The Index in February increased to $28,840.43, which is up 1.1% from January and 0.5% more than the previous record high price in October 2005 (which was in the immediate aftermath of Hurricane Katrina). The most stunning aspect of these numbers, which were gathered on February 15, 2013, is there is snow on the ground in the Northern regions and it is the middle of winter for many areas.
There are some major risk factors facing the market, which could propel the market higher. For example, what happens if this spring has a bad tornado and hail season where thousands of roofs have to be replaced? Just look at what happened in Hattiesburg, Mississippi last week. What happens if there is a real spring building season this year, which has not been seen for many years? What happens if more companies go out of business?
It concerns me greatly that the odious rules from Washington, D.C., which include OSHA, EPA and Labor, plus the impact of Obamacare, are creating an environment of uncertainty and fear, keeping companies from gearing up despite increased demand. Firing up manufacturing facilities and mills will require many companies to invest millions in new regulations. In addition, if the economy (which many view as tenuous at best) falters then many companies are subject to the layoff notice rules, which could cost millions. There is also the big gorilla in the room--lack of capital.
Many independent companies simply do not have the cash or credit lines to expand. In short, I have said for several years--we have seen utter supply chain destruction in the Great Recession and it appears this chicken is coming home to roost.
Specifically, here are the items which changed in price the most during the last 30 days in the Index:
If that is not bad enough, here is the latest on future price increases. Roofing manufacturers have announced two price increases for the next three months, and many are predicting that 30-year, architectural shingles will be over $100 per square by summer. Shortages and late deliveries have already begun in the shingle supply industry here in Florida, as manufacturers are slow to add production and demand is outstripping supply.
This week, most of the national door companies announced 6% increases in door pricing in the next 30 days. In addition, concrete manufacturers are priming for an increase. Even worse is the problem with fuel pricing. Expect to see heavy doses of delivery and fuel surcharges added to all supplies, as dealers struggle to cover soaring delivery costs.
Now, for my biggest concerns: I am concerned that pricing will actually eat the market up; and, in my view, the markets are too high. Dealers will be unwilling to build inventories during record high pricing, and it appears an overall softness is beginning to permeate the economy because of the payroll tax increase, expiration of the Bush tax cuts, and soaring fuel prices. This market had a brief correction the first week of February, which was halted by the speculation of a large China buy and a fire at an OSB mill in Canada. This tells me the market could be in an emotional state and the fundamentals of the economy could be shifting, which knocks down projected starts for the year.
Who knows what is gong to happen? However, there is one thing I know for sure--February’s pricing goes against all the norms, which usually means trouble. My recommendation is to update pricing on projects monthly, have a price escalation clause in your construction agreement, and stay informed. Do not use today’s pricing for quoting projects six months from now.
There is a real chance that this high run-up in price will wipe out many suppliers and builders who did not properly protect themselves against high pricing. For that reason, plus the utter weak state many companies are in, I predict we could see more closures in the supply chain in the next year, which will only add to the headaches. Hold on! This ride could get real bumpy over the next few months.
The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index) for March 15, 2013 increased 1.5% to $29,263.31 from the prior month. This is the second consecutive month in which a new record high price for the Index has been hit. Since mid-December 2012, this is the third consecutive monthly increase with the total Index adding 6.2% in cost. It is very apparent that strained supply due to supply chain destruction and the desperate need by manufacturers and suppliers to turn profitable are driving these record high costs.
The cost increase in this month’s Index was a mixed bag of price changes and not just from lumber related products. In March, the Index was pushed higher on increased concrete and block pricing coupled with increases in other related building material areas.
The following are the cost changes, which affected the Index:
The high costs in the market are beginning to have some real impacts on the ground in two ways:
Governmental issues are also affecting this market in many ways. Due to the impact of Obamacare and the general uncertainty in the market, companies are very slow to add production. New regulations on employee layoff notifications have spooked companies to a point in which they are trying to make do with what they have. This slowness to add production is keeping the supply chain in shambles.
Over the next month, expect higher costs in shingles, metal products and mouldings, as those supply chains remain very tight and fuel prices continue to increase. Lumber related products are near record levels; and, if softness is beginning to enter the marketplace there could be a price adjustment in the short future. The best advice I can give any builder is to make quotes good for a limited time period and put a price escalation clause in all contracts.
It is very apparent that despite inflation and improved business, many builders and suppliers lost a lot of money during these price runs because they did not implement the price protection tools they needed. Now is the time to be smart and make money.
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