Are dropping lumber prices leading to falling home construction prices?
Big news headlines lately are screaming that lumber prices are dropping. Before you get too excited, that’s only partially true.
The lumber prices you see in these clickbait news articles are typically “lumber futures.” Lumber futures are defined as the contracts investors buy and sell to each other. These commodities contracts aren’t necessarily a reliable indicator of the price a builder pays the supplier for studs, joists, rafters, and so forth.
The Partial Truth of Falling Lumber Prices
Having said that, we have seen some decreases in lumber prices recently. It's important to remember, though, that this decline is relative. It has to be taken in context.
Let’s put things into perspective. Every month at my company, we apply our hardwood and softwood lumber prices to a standard material estimate we use for a house plan we built several years ago.
By using the same material estimate every month, we can compare what it would actually cost to frame that same house month-over-month, so we have a real idea of what impact any increases or decreases would have on building an actual house.
Here’s what it looks like for real home builders like us:
- In March 2020, just before the world went crazy, the cost to frame a house was $14,268.01. This is the baseline.
- In June 2021, the cost peaked at $42,521.44. That’s 3X higher than the baseline.
- As of September 2022, the cost is $21,228.92. That’s still 1.5X higher than the baseline.
One thing to remember is that lumber is a commodity, like gasoline. It goes up and down, but the overall trend over time is up.
Think about it this way: you’ve seen gas prices higher than they are today, but you’ll never see them at $1.15 per gallon again, will you? That was the average price in September 1995.
In September 2005 it was $2.95, so when it went back to $2.27 in September 2020, it seemed really cheap, right? But it didn’t go down to $1.15. That’s the way you have to look at building products like lumber when determining your home building costs, especially in the post-COVID era.
The Reality of What Falling Lumber Prices Mean for the Housing Market
The other big thing to remember is that lumber is just one element of a house. Every other element has also continued to increase in price. So even if you’re seeing your home building lumber costs go down right now, they’ll likely be offset by increases in other building materials.
Demand for building materials also competes with other industries for resources like steel, fuel, and labor, all of which are more expensive than ever. Supply chain issues are plaguing every industry, and residential construction is not insulated from that.
Longer-term, even with inflation and higher interest rates, it looks like there will be strong demand for single-family homes well into the future. This tells me that we’re not going to see new home building costs and prices come down.
These prices may level off a bit, but with the rate of new household creation and the fact that everyone has to live somewhere, the demand has to stay strong, even if that means more homes being built as rentals. So if you’re in the market to build, not to rent, you’ll be competing for resources with the builders who are building to rent.
Turner & Son is Looking Out for You
Bottom line, while we’ll see some ups and downs in lumber and maybe some other commodities used in construction, we’re not going to see an overall drop in prices anywhere on the horizon.
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