A runup in the price of lumber is focusing attention on the dark side of the remarkable decade-long housing boom.
Pushed by continuing strong sales of housing and the demand for materials to rebuild storm-damaged Florida in the aftermath of Hurricane Charley, prices for lumber futures rose to their highest level in 10 years this week at the Chicago Mercantile Exchange.
The spike reflects the continuing price escalation of basic construction materials which, coupled with other factors related to demand, has pushed home prices higher.
Since October, the cost of a new 2,000-square-foot house has increased by $5,000 to $7,000, said Christopher Shaxted, executive vice president of Lakewood Homes in Hoffman Estates. Besides lumber, the rising cost of land, higher fuel prices and even demands on builders by municipalities have put pressure on prices.
“There has been price volatility for the last year,” Shaxted said. The price of framing lumber is up 50 percent since last August, and there have been significant price increases–up to 70 percent–in plywood and OSB (oriented strand board) as well, he added.
The outlook, if costs keep rising, is that new-home prices will continue to increase next year.
Dan Star, president of the Illinois division of Centex Homes, said his costs are going up an average of “6 percent to 8 percent this year overall. And at least that much again next year.”
While builders try to anticipate the increases, Shaxted said home prices are adjusted according to costs. “If you come in [to buy] next month, you will see a higher price,” he said.
Framing lumber has increased from $322 per thousand board feet a year ago to $474 per thousand board feet as of Aug. 13, according to the trade newsletter Random Lengths. The newsletter updates prices on a weekly basis.
Ironically, the reason most often cited for the ongoing price hikes is the strong pace of construction.
“It’s tied to housing starts,” said Ron Jarvis, vice president of lumber merchandising at Home Depot Inc. Lumber prices were falling earlier this summer, and “retailers had adequate inventories.”
Since mid-July, however, the price rise has been unabated.
Now the cleanup from Hurricane Charley ignited demand for building materials. “We moved a lot of lumber, about 450 to 500 trucks of plywood, into hurricane markets before the hurricane hit,” Jarvis said.
At Lowe’s Cos., spokeswoman Chris Ahearn said the hurricane has not had an immediate impact on lumber prices, but “since it’s a commodity and it’s priced week to week, we can’t predict the future.”
Regardless, “lumber prices are probably about 40 percent higher this year than last year on average,” she said.
A short-term spike in lumber prices will not affect major home builders, said Harry Seigle, chairman of Elgin-based Seigle’s, a lumber and component supplier to builders.
Major builders tend to lock in contracts over a fairly long time, he said.
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Others may feel the pinch.
The do-it-yourself consumer will view the higher prices “just like the motorist feels a gas price hike first at the gas pump,” Seigle said. “I think the remodeler is caught in the same pinch.”
On the other hand, he said people should put the price hikes in context. Plywood, for instance, is up to $15 a panel from $13 a few weeks ago, which translates to about $200 to $250 for an average room addition to a home.
“That’s a lot to some, but not a deal breaker to others,” Seigle said.
Dave Brady, owner of Oak Design & Construction in Oak Park, said his lumber costs are up 10 percent to 15 percent this year.
“That could be $3,000 to $4,000 in costs borne by homeowners on a $200,000 remodeling project,” Brady said. His 18-employee firm and its prospective customers reach agreement on the project’s cost up front, meaning there aren’t any surprises for the homeowner.
But Brady expects lumber prices to rise 25 percent to 30 percent due to a panic run after Hurricane Charley.
“It’ll start to show up in three to four weeks, when inventories I bought at the old prices run out,” he said. In response, “we’ll be purchasing materials now for projects slated for 4 to 8 to 10 weeks out.”
Lumber prices can be fickle.
On Thursday morning, Home Depot was forecasting a dip in prices this week as wet weather halted projects and summer started drawing to a close. “There aren’t as many projects now as there were two or three weeks ago,” Jarvis said.
But by midafternoon, Jarvis changed his tune as news of a fire in a West Coast rail tunnel spread. That will affect delivery of materials, with more shipped by truck instead of rail.
Now “we’ll see price increases on the West Coast over the next month due to this fire.”
Whether lumber costs moderate or not, local builders say other costs are rising.
Increased land costs, including entitlements to municipalities and development, coupled with higher material costs, could add 10 percent or more to the price of a new home this year and next, said Centex’s Star.
Peter Goergen, executive director of sales for Burnside Homes in Downers Grove, said almost all materials–including concrete, steel, gypsum and insulation–are going up. Even labor costs are rising as new labor contracts will take effect later this year.
And don’t forget the higher cost of gasoline, he said.
“Most of these supplies are shipped by truck,” Goergen said. Initially, suppliers ate the higher transportation costs, but as fuel prices remained high, those increased costs were added to pricing.
“It doesn’t seem like much, but it’s a lot in a metropolitan area like Chicago where you pack a lunch to drive,” he said.
“They are in traffic longer. Everything is trucked to the site … everything.”