06 Mar 2013

Stock and Lumber Markets Soaring – Watch Your Lumber Budgets!

On Tuesday, the Dow Jones Industrial Average went to an all-time high as investors continued to push up stock prices.  Some of that same bullish attitude has definitely spilled over into the housing market as housing starts have begun to rise, especially here in North Texas. 

Huge Increases in Mill Prices. As a result of the increased demand, extended mill order files and lean inventories at lumberyards, lumber and panel prices at the mills have been soaring.  OSB products have more than doubled (up 114%) in the past year and Southern Pine plywood sheathing is up almost 40% above year-ago levels.  For lumber over the past year, studs are up 38%, Southern Pine is up 54%, and SPF is up 44%.

Supply and Demand. As a commodity market, lumber prices react just like your old economics teacher said they would – if supply stays steady and demand increases, then prices go up.  Even though new housing starts pale in comparison to boom times, lumber demand currently far outstrips supply, creating a stark imbalance and significantly higher prices. We have actually seen a steady climb of lumber prices since the summer of 2012, but things have really taken off here in the last few months as some optimism and building levels have picked up around the country.

Why Doesn’t Supply Pick Back Up? During this deep recession, many lumber and panel mills shut their doors, laid off employees and suffered big losses as the industry significantly contracted.  With many false starts and uncertainty in the economy, mill owners have told us that they do not intend to re-open facilities until they “see the whites of the eyes” of this recovery.  A typical shuttered mill costs $10 -$15 million to re-hire, train and re-start production. Those mills are content to turn red ink into black for awhile before investing that kind of capital.  We are just starting to hear about mills discussing adding production to capitalize on the strength of this market (at which time, the increased supply will begin to re-balance the equation and level prices back out).

Your Framing Lumber Budgets. In the meantime, please check with your lumber supplier (which should be Davis-Hawn!) before plugging in those budget numbers from the last house you built, particularly if that was in 2012.  OSB prices are within sight of the record levels set during the historic 2004 market run.  Always be careful with framing lumber estimates, but especially during price bursts like this one.

We’ll explore the reasons why lumber estimating is so difficult and frustrating for many builders in our next blog, but until then .  .  .  Please remember that the quantities listed on a lumber takeoff are simply the estimator’s best guess as to what the proposed project will likely require.  The bottom line estimate number is merely a helpful guide to the builder in formulating his budget for the project.  It cannot be your real budget number - it is simply a good starting point!

Use Your Experience. Wise builders will filter the estimate number through their experiences (actual costs from past jobs that were similar), factoring in any past results with this same estimator, considering current price levels and definitely adding a contingency amount to the estimate (usually 10-15%).  This contingency amount is for missed items, price increases, change orders, and just to make sure that you’re not over-budget on the 2nd major category (after foundation). Of course, it’s been a very difficult environment lately with clients hammering us for cut-rate prices and tight budgets, and then getting upset when the inevitable contingencies (and overages) actually happen.  Hopefully, it is about time to reassert more realistic client expectations back into the building process! 

For now, be very careful with your lumber budgets and Build to Last.

Tagged as: Cost/Benefit
Category: Lumber

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