There has been a lot of talk and concern lately over lumber – everything from price to supply and demand. And, all for good reason. As we entered spring and summer of 2020, the panic was primarily focused on the unprecedented soaring cost of lumber. We talked about the factors that influenced the rising cost of lumber in our last blog. As we move into spring of 2021 and the effects of the pandemic begin to shake out, the questions turn to where does the construction industry stand now and is the lumber market over-bought or is it really just a case of premature buying?
The cost of lumber is still at a record high – up more than 185% since the start of the pandemic – leading many to simply blame the nearly unheard-of increase to a lumber shortage. While that may have been the culprit a year ago, there are other factors now at play that are impacting the construction industry and creating an illusion of a supply shortage.
In January 2021, 1.88mm new home permits were issues but only 1.34mm were actually completed. That leaves approximately 500,000 homes that still need to be completed. The discrepancy between permits issued and projects completed is tied to supply chain issues with non-lumber materials, like windows, and the labor shortage. When you buy on the number of new home permits, you run a big risk of over-buying. And when you can’t hire the trades needed to keep projects moving, you’re left with jobsites on standstill.
In an effort to stay ahead of the potential supply issues and cost increases, buyers did what made sense – they bought based on permits. This is different than over-buying. It’s better classified as buying before there’s a need – or premature buying. And, the more we prematurely buy, the more the industry feels like it’s in a pinch. The reality is buyers have bought more lumber than can realistically be used.
A Double-Edged Sword
At Quality Buildings, we get a lot of questions on how to best navigate some of the unknowns facing the construction industry. Our advice regarding the current lumber market is to award the framing package as soon as possible to allow the contractor the required time to procure materials at the best price or the opportunity to explore alternate materials if the specified materials are not guaranteed to be available when needed. The more time a framing contractor has to buy the lumber, the better we can work the market and buy accordingly. In addition to more negotiating leverage, awarding early helps you secure the best quality framer. In-demand framers often face backlogs and therefore won’t have much more capacity for new projects in 2021. At the end of the day, the buyout dilemma is how to get the best price you can get in material while being careful not to lose everything you saved by paying a premium for labor. Our best advice is to be proactive in securing labor for projects 6 to 12 months out. Like many others, Quality Buildings is already starting to focus on 2022 projects.