Inflation Pressures Building & Remodeling Industry

Building and Remodeling costs for new homes and major addition and remodeling projects have increased between 50 - 70% since 2019. Price increases for other types of home improvements may be less than 50% (tile work and painting) or may be higher than 70% (decks, woodwork intensive projects). In any event the price increases are significant and have happened quickly

Lumber is reported as price per 1,000 board feet (mbf). This is the typical unit of measure in the construction of homes and other buildings, and serves as an appropriate market gauge. As of this writing, the price per 1,000 board feet is currently sitting just under $1,200. To put that into perspective, the price usually hovers around $200-300 per 1,000 board feet.

The COVID-19 pandemic was a severe shock to the lumber industry. Demand for lumber fell drastically, logging operations were reduced and/or suspended, saw mills reduced production and some shut down entirely. No one expected the surge in demand for housing, remodeling and home improvements that shows no signs of slowing down. On top of these factors, climate change has contributed to the lumber shortage. The spruce beetle has flourished due to the warming climate and is responsible for a 40% drop in lumber imports from Canada. The lumber supply chain simply cannot meet current demand and is struggling to get back to pre-pandemic levels of production. Saw mill operators have improved efficiency of existing mills and a few small mills are re-opening, but new saw mill cost and time to build (hundreds of millions of dollars, 2 years) are major deterrents.

Lumber yards are not able to guarantee pricing on most lumber items if they don't have the material in stock. Lumber wholesalers are telling their lumber yard customers that material prices will be determined at time of shipment. This restricts supply further, since lumber yards are hesitant to stock up on inventory which may be overpriced. Local lumber executives (metro DC) indicated that they expect the shortages and high prices to remain until the end of the year. Other economists and industry experts agree, although some think it'll be 2023 before lumber prices return to pre pandemic levels. (click here for article in Forbes “Why Lumber And Plywood Prices Are So High—And When They Will Come Down”).

The resin shortage is also effecting pricing and availability of electrical wiring. Coupled with the spike in copper prices, standard residential wiring is roughly 200-300% more expensive than last December. My electrician explained that he must often go to three or four electrical suppliers to obtain all the materials needed for his projects. Very few suppliers have all the materials at one location. These factors drive up costs of providing electrical contracting services, and he is not alone. Many trade contractors are faced with similar issues.

The HVAC and plumbing industries are also effected by copper price increases and shortages of computer chips. HVAC equipment uses many sensors and controls which use semi conductors and the supply chain for them is not flowing smoothly. Wholesalers are alerting their mechanical and plumbing customers that prices are going to go to up and some items may not be available.

Steel and aluminum prices have increased also. One supplier referenced his costs going up for 70% for metals. Glass prices have gone up too, albeit not as dramatically, in the 10-15% range. Windows and exterior doors use wood, glass and metals and major manufacturers have had two price increases in the last six months. As their raw material prices increase they plan to continue to pass them along to consumers. Drywall materials costs have gone up 60% in the past six months. The list goes on and on.

Material suppliers are warning their customers that the lead times for their products or services are extended well into the future and are subject to change. A major roof truss manufacturer that normally had a 3-4 week lead time for roof truss delivery is now quoting 9-10 weeks. Builders and contractors must constantly monitor the status of their material orders and adjust their schedules accordingly. Careful planning, including ordering materials well in advance of when they are needed is essential to maintaining a smooth construction process. The supply/demand imbalance will eventually find equilibrium, but is is likely to take several years before that happens in the building and remodeling industry. In the meantime, what can be done to manage these issues?

One possibility is to delay the project until the industry supply/demand imbalance levels off. For large projects which might take 8-12 months to complete, it can take a year or more to design, specify and budget the project, so it might be wise to initiate that process and work through all the design issues as well as to develop a budget evaluation by a professional contractor which can be updated as pricing pressures ebb in the future. This approach is very valuable for the entire project team (owner, architect, builder, design-builder) since it allows the project team to plan the project thoroughly.

If the owner doesn't want to delay the project the same careful preliminary design and feasibility study of the project will provide the careful evaluation and planning that all projects require for best outcomes (on time, on budget with minimum surprises). The definition of “on budget” is that the project is built for the amount agreed upon. The current challenges facing the building and remodeling industry must be acknowledged and addressed, and allocated for on a case by case basis as different factors may impact each project.

The US 30 year mortgage rate continues to hover near its all time lowest rate, helping to fuel current housing, building and remodeling demand. There are terrific financial products available which help owners to maximize the efficiency of leveraging low rates to borrow what they need for construction and remodeling costs and then roll that loan into a permanent mortgage loan (construction loan to permanent mortgage). There are numerous other financing avenues available to owners today as well.

The need for experienced, skilled tradespersons and construction managers is probably going to increase and until young people want to pursue a career in the building industry and the educational programs are improved and new ones developed the shortages of labor will probably persist. If you want to do a significant project soon, this is a good reason to seek out an experienced professional to work with on your project now.

If you have multiple relatively small projects you plan to do, consider prioritizing them and tackling them one at time. This will allow you to focus on each project thoroughly and should have good results. It should minimize the supply constraints and price increase impacts as you deal with fewer variables on each project.

The following link is an informative article on the past three years pricing history of a 3000 SF new house in Boise, Idaho. It is a realistic example which outlines the major components that go into building a new home and shows the price increases from 2019 to 2020 and 2021. The prices will vary depending on your local market. The same components are found in additions and whole home renovations. https://www.bloomberg.com/graphics/2021-us-housing-construction-costs/?sref=BaJ7o3ll

In summary, if you can wait for the building demand surge and supply chain shortages to level off, the pricing of many components will come down and availability should improve. Where it all settles down is hard to predict, and the labor shortages will continue to put upward pressure on building and trade services cost.

If you have a project in mind you'd like to discuss or you have any questions, feel free to contact me directly at adean@alexandergroup.net

Call us at: (301) 230-3040

All the Best,

Alex