Cracks in the commodity market in April have developed into what appears to be a short-term correction this month. As of mid-May, the Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index) dipped 3.2% to $29,068.11, which is still 5.5% higher than December 2012, and the Index’s third highest price since its inception in 2005. The sharpest declines occurred during the end of last month and the first week of May with the week beginning the process of forming a bottom.
Don’t forget, this Index is based on wholesale pricing, and pricing on the contractor/retail level for most dealers is about 2-4 weeks behind as inventories are replenished.
Over the last several months, I have warned our readers about a softness entering the market because, in my view, pricing went up too fast too quick. This modest give-back is a result of mills and manufacturers not understanding the Mendoza line--where pricing will stop projects.
Currently, there are two competing stories in the commodity markets. The first story is this market adjustment will continue and prices will moderate; and the second one is, as you may have guessed, this market is temporary because supply remains tight.
Here is my three-cent opinion for the next two months. Pricing will fluctuate modestly up-and-down for the next couple of months until it finds a soft landing. There will be some items dropping in price, but others will firm because there is simply not enough in the supply chain. The housing market should continue to improve spurred on by huge increases in the stock market and a general improvement in the economy. Any modest increase in demand will put upward pressure on commodities; even now, suppliers’ inventories are woefully low.
I expect prices to firm later in the summer, as hurricane season and an increase in housing demand collide, and the harsh reality of a broken supply chain is exposed. Volatility will be the buzz word the last half of 2013. My advice to builders--the price you bid a project today may be totally different in two months. Utilize a price escalation clause, and in the case of hard bid situations, quote pricing established during the peak months of March and April. Strap in--this ride looks bumpy.
Here are the most notable price changes for mid-May.
On the horizon, there are increases announced in roofing, insulation and windows; however, it remains to be seen if these new prices will materialize. One serious issue for most builders is window availability. With a historical number of window manufacturing facilities closing their doors during the last five years, coupled with the lack of skilled labor, window products have been experiencing huge delays. In doors and windows, builders will have projects delayed if they do not place their orders well in advance of their needs. I see little hope in the window and door issue resolving itself in the next few months.
The worst thing a builder can do is quote May or June pricing for a project in October. It would not surprise me at all to see the market power back to March and April levels on some items, so be careful.
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.