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Home builders juggle intense demand, cost increases for materials

Home builders juggle intense demand, cost increases for materials

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Checking the price of lumber has become a part of Alexander Boone’s daily routine.

“I never thought that I would have a commodities website on my computer every day,” said Boone, president of ABoone Homes, a Roanoke-area custom home builder.

But the current volatility of lumber prices demands such close attention. Lumber is one of a number of building materials in high demand that have become significantly more expensive over the last year; the National Association of Home Builders estimates the impact of rising lumber costs on the average new single-family home to be an additional $36,000.

“Honestly, it’s really hard to price a house today because you have no idea what’s going to happen in the next couple weeks,” Boone said.

While the increased cost of lumber and other materials has affected some consumers’ ability to purchase a new home, Boone said demand remains strong.

“At the end of the day, the interest rates are so low historically that they’re really able to absorb the increase in the expenses,” he said.

The NAHB tracks weekly fluctuations in the price of lumber, using a measure called the Random Lengths Framing Lumber Composite. Prices have skyrocketed more than 300% since April 2020, with a peak of about $1,500 per thousand board feet in May.

Over the last few weeks, prices have begun to fall, but lumber still remains significantly more expensive than it was prior to the pandemic, when it sold for about $350 per thousand board feet.

Those in the building industry say a number of factors have contributed to the increased cost of lumber: a surge in construction — both new and remodels — in the United States, a decline in production at mills because of the COVID-19 pandemic, and tariffs on Canadian lumber.

The goods economy did well in 2020, as the pandemic forced people to stay home and forgo experience and services. Housing is the ultimate good, Robert Dietz, chief economist for the NAHB, said in May.

For many, household balance sheets improved during the pandemic due to an influx of stimulus money and a decline in spending. As a result, Dietz said, people were able to save more money and put it toward a down payment on a house.

In Virginia, building permits for single-family homes grew 13% in 2020. Dietz said growth is expected to continue in 2021, though perhaps at a slightly slower rate.

Low interest rates have also been a factor, but Dietz said they will trend higher with the economic recovery. At a certain point, climbing interest rates are likely to slow home sales, but until then he said demographic trends indicate that demand will remain strong.

“We know we don’t have enough inventory in the housing market, whether it’s rental or for sale,” he said.

While lumber was one of the first building materials to experience pressure, Dietz said it’s really a broader issue, noting recent challenges in obtaining appliances. A May NAHB survey of single-family home builders found that building materials increased an average of 26.1% over the past 12 months.

Cost fluctuations have prompted some changes to the way ABoone Homes does business.

“We’re still building spec houses for sale because the demand is there and the market really needs them, but we’re waiting to list the houses because we don’t know what they’re going to cost to build until we get much further along in the building process,” Boone said.

Normally, spec homes are listed when they’re first framed so buyers can customize the house to create their ideal home. But he said there’s currently too much uncertainty both around cost and timing to operate that way.

With such volatility in the price of materials, Boone said many builders favor a cost-plus pricing structure — clients agree to pay the actual cost of building the house, plus a builder fee, which is typically about 15%.

But builders aren’t always able to pass their costs on to customers. Boone said some contracts inked last year did not account for the dramatic increase in the price of lumber.

“At the beginning of the pandemic, it looked as if we were going into another economic depression. I was thrilled to enter into a contract in that environment,” he said. “But what’s happened is lumber accelerated tremendously and we already had these contracts and houses, so we ended up having to absorb a lot of those costs.”

The industry is also grappling with a labor shortage, a problem that existed prior to the pandemic. Boone said his company is lucky to have good relationships with subcontractors, who will usually prioritize his company’s projects, but they are overwhelmed with work.

Renovations in demandJosh Beisley, an estimator for Building Specialists Inc., said demand also remains strong for home additions and remodels. The low housing inventory and high cost of purchasing a home makes improving an existing home an attractive option.

The bulk of the Roanoke company’s work is renovations, rather than new construction. Though projects vary greatly in size and scope, Beisley said they generally cost 15% to 25% more today than before the pandemic.

“Lumber has been the one that’s received the most publicity, but really any material that comes from a manufacturing plant has had more significant cost increase over the last 12 to 18 months than historically average,” Beisley said, citing drywall, roofing shingles, PVC piping and electrical wiring as examples.

Building Specialists works to share the increased costs with customers, he said. Several months can pass between a client’s initial inquiry and the beginning of construction, making it difficult to accurately estimate the cost of some materials. For lumber, Beisley said customers pay the actual market rate at the time it’s purchased.

“That way the consumer gets the advantage if the prices do drop, and we are protected if the prices continue to rise,” he said.

Lumber is not only essential for framing a home, Beisley said, but is also critical to other components in residential construction, such as hardwood flooring and cabinetry. He said some clients who planned on hardwood floors have switched to ceramic tile or engineered products.

Some customers have opted to postpone projects in the hopes that costs will stabilize, but builders are still keeping busy.

“I would say at this point demand is still strong and there’s no telling how long that will last,” Beisley said. “The recent forecasts that I’ve seen have expected above average remodeling to happen through at least 2022.”

Waiting doesn’t always pay off. Beisley said some customers delayed home renovations when prices began to rise, only to see them climb even higher months later.

Existing labor shortages in the construction industry have been exacerbated by the boom in business.

“With the added overall demand for the industry it has stretched everybody very thin on manpower,” Beisley said. “So we are struggling more than ever with not only material shipments and scheduling but also just local labor scheduling to keep up with demand.”

Suppliers face challenges

The situation has been equally frustrating for suppliers.

Ryan Cappellari, chief operating officer for Capps Home Building Center, which sells to both builders and retail customers, said access to materials remains a challenge and there have been disruptions throughout the supply chain.

“There isn’t anything that’s not been affected by this,” he said.

Scheduling is always difficult in the construction industry, Cappellari said, but it’s become even more so with lengthy lead times.

The intense demand alongside the pandemic came as a surprise to those in the industry. Some manufacturers had decreased production, expecting a slowdown.

“Everyone anticipated things just shutting down,” Cappellari said. “People weren’t going to do projects, weren’t going to build houses.”

But the opposite occurred. People were stuck at home and wanted to tackle improvement projects or build a home to better meet their needs.

Capps, which has Smith Mountain Lake and Roanoke locations, has been working to aggressively grow and to pursue new customers over the last decade. But Cappellari said shortages have forced the company to pump the brakes, turning away new customers so it can continue to serve existing ones.

“There has to be a ceiling. This can’t continue to escalate. It’s not sustainable,” he said. “But where that ceiling is, I couldn’t tell you.”

Cappellari said he would have guessed that tipping point would have arrived six months ago. But as long as people keep building, supply will be constrained and prices will remain high.

David Frank Builders has more residential contracts than usual for 2021. The company typically builds two to three homes a year but has six projects on the books for this year, said president David Radford.

Framing lumber escalation clauses were included in each of the contracts, he said, a new practice in response to the current situation. The clauses protect the company from the volatility in pricing; Radford said the lumber overage on a house outside Rocky Mount the company just finished framing was about $28,000.

“My clients that I’m building houses for now, some of them watch the lumber futures like every day or every week,” Radford said. “It’s sort of a frightening thing.”

Though lumber prices have started coming down, Radford said sheet goods are still unstable, something he’s been told could continue through the end of the year.

When Radford was told the lead time on garage doors was four to five months, he decided to order them for most of the jobs on his slate for the year. Similarly, he purchased the electrical wiring needed for several projects since its cost is also rising.

“I’m doing pre-purchasing right now to sort of stave off those increases,” Radford said.

One bright spot: David Frank Builders meets certain energy efficiency requirements in its homes, meaning it uses materials for which the demand is not quite as high. That’s because the supplies are more expensive, he said, but it also means they are more readily available currently.

Despite the challenges, Radford said he isn’t worried that rising prices will create an affordability issue that would hurt his business. There’s simply too much demand, which he attributed in part to low inventory and also to first-time millennial home buyers.

“The lumber is just a phenomenon of COVID. But before COVID hit, we were ramping up with orders that were just back to the pre-2007 era,” he said. “It’s going to take more than inflation and the supply-demand [issue] to stop this because it’s the pent-up demand that we haven’t fulfilled since 2008. It’s going to keep going.”

“Honestly, it’s really hard to price a house today because you have no idea what’s going to happen in the next couple weeks.”

-- Alexander Boone, president of ABoone Homes, on the impact of rising lumber costs

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Casey Fabris covers business for The Roanoke Times, where she has been a reporter since 2015. Previously, Casey covered Franklin County. She can be reached at (540) 981-3234 or casey.fabris@roanoke.com.

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