How Do High Lumber Costs Affect Margins?

by Sean Shields and TJ Jerke

 

A recent series of articles leave a reader wondering, “what are the true effects of higher lumber costs on the ultimate price of a house?”

LBM Exec publisher Greg Brooks stated in a recent article, “Framing materials make up 8% to 9% of the dollar value of a single-family building permit. Permit value doesn’t include land or site development costs, so depending on where you are, lumber and panels may be no more than 5% to 7% of the selling price of a home.”

According to his analysis, a 30 percent increase in lumber costs on a $300,000 house is only $5,400, or roughly 1.8 percent of the selling price.  That doesn’t seem like much, but Builder Magazine editor John McManus offers the counter-argument that higher lumber costs are just one of many factors that are worrying builders at the moment.  “Fact is, for builders--especially when they're trying to engineer their operations and products to meet lower price tier opportunities against a range of opposing forces--land prices, regulatory fees, and skilled labor capacity challenges—every cost counts.”

This seems to agree with analysis from the National Association of Homebuilders (NAHB), which argues the issues like lumber price volatility are having a real impact on the affordability of homes, “tariffs are harming housing affordability, causing extreme price volatility and incentivizing foreign nations to boost lumber exports to the U.S. because of record-high prices.”

One lumber market expert, Matt Layman, believes this whole debate will be over soon anyway.  According to his latest analysis, “North American softwood framing Lumber 2x4#2 has reached my $600 /mbft fob mill forecast with every species except SPF western Canada. The record bull market is losing momentum. [I’m] now forecasting record lumber BEAR market crash to begin in March 2018. Initial target is down $200/mbft by August.”

If record high lumber costs are truly having an impact builder’s profitability, builders and developers will want to continue to pass on those costs to keep their return on investment at a reasonable level. However, as sales prices rise in concert with rising construction costs, builders and developers will be motivated to keep their pass through cost levels at whatever eventual high mark they attain. As costs come down (as Layman predicts) and pressure mounts for resulting costs of goods sold to come down, it seems to make sense for everyone to seriously consider maintaining a level cost of goods sold playing field because it is very hard to predict the next time lumber will go from $350 /mbft fob mill to $600 /mbft fob mill.

Why take the risk?