The rise in costs of residential building supplies and shortage of skilled laborers over the past 18 months has been well documented in the news. The effects Covid-19 pandemic on the supply chain for products and materials used to build new homes has created a myriad of challenges to builders and to the end consumer. Recently, we’ve received some positive news regarding the drop in the price of lumber.
This Spring (2021), the price of lumber reached an all-time high of more than $1,700 per thousand board feet. That is almost five times higher than what it was last Spring (2020). This extreme spike was directly related to shifts in the supply and demand of lumber due to the Covid-19 pandemic. Fortunately, as of August 2021, the average cost of lumber has dropped back down to Earth. The price per thousand board feet is now about $500. This translates to about $40,000 in savings (on average) to build a new home.
Other Cost Factors
One may assume that this significant drop in lumber prices will equate to significant savings on the end cost of a new home, but this is likely not the case. While lumber prices are falling, the prices of other building materials are surging. Here are 5 other factors that are driving up the costs
Only about 80% of skilled laborers returned to the construction industry after the brief shutdown last Spring. Many workers expected the shutdown for construction to last much longer than it did and fled to other regions and industries to survive. This has left a shortage of about a quarter of a million skilled laborers nationally. Getting the workforce to come back to building homes has been difficult and required home builders to offer higher wages to workers. The labor shortage is also causing delays in the time it takes to complete a project and thus creating more holding costs for the developer.
Steel Mill Products
Steel mill product prices increased 10.8% in July following a 6.2% increase in June. Tariffs on steel imports have been blamed for adding to building costs. With steel prices continuing to set new highs, contractors remain behind the curve in regard to passing on costs, even though lumber prices have tumbled and copper prices have dropped.
Cement and concrete products have seen an outsize impact of recent building trends, with prices rising substantially over the course of the pandemic and reaching a record level in April. That’s in part because, like lumber, no other material competes effectively with concrete in key homebuilding applications, notably foundation slabs. It is also widely used in outdoor living installations like patios, pools, and outdoor kitchens – all popular home improvement projects, which exploded in number during the pandemic.
The pricing spike is expected to be only temporary, however; as demand abates somewhat and suppliers catch up, prices for concrete and other building materials will come back down.
Supply Chain Issues and Timelines
Issues stemming from supply chain disruptions often result in increased costs, completion delays, and even impacted lender loan portfolios — particularly construction loans relying on a robust labor force and time-efficient material deliveries.
Shortage/Price of Buildable Lots
Because the demand for new housing remains high, particularly in the West and South, existing lot shortages are especially troubling, according to industry professionals. The inventory of lots is very low. Couple this with the high demand for these lots and we have a recipe for inflated prices to secure a place to build new homes.
What Happens Now?
Lower lumber prices are a welcomed adjustment, but it likely won’t lead to any savings realized by new home buyers for quite some time. Many builders are still working with an inventory of lumber purchased at peak prices, and many other vital residential building materials are increasing in price. These factors and the continued issues with the supply chain and shortage of skilled laborers will keep overall costs high for home builders.