Navigating Rehab Hurdles: Lumber Shortages & Material Price Hikes

While the skyrocketing cost of lumber didn’t start the fire, it has certainly fueled the flames of red-hot housing prices seen throughout the U.S. in the past year. Fortunately for home builders, rehabbers, and buyers, lumber prices appear to be cooling off in June—somewhat, at least.

High Lumber Prices Ease Up

Throughout the second half of 2020 and into 2021, the cost of wood quintupled to record-setting heights, caused in part by an uptick in demand for new homes, increased interest in renovation projects, and supply chain disruptions in the wake of the pandemic. Topping out at over $1,600 per thousand board feet (MBF) this May, prices in June fell 42% to $1,000/MBF—an undeniable reprieve yet nearly twice the cost of what is typical this time of year.

As pandemic restrictions have lifted and employees get back to work, sawmills have begun ramping up production to meet builders’ demand, allowing the current price and futures price of lumber to decline in recent weeks. Experts say wood costs are likely to fall further, especially once home building slows down in the colder months; however, prices are unlikely to reach pre-pandemic levels. In March 2020, the futures price was $303.40/MBF.

Will Home Prices Level Out?

Data show builders would need to construct 3.8 million homes to meet current demand. Lower lumber prices mean building will pick up speed, as projects resume that were put on pause due to the prohibitive cost of materials. And the trickle-down impacts will spell good news for buyers.

Housing prices should cool off somewhat, as the elevated cost of building was being passed on to those purchasing new-construction homes. In addition to new builds with more affordable price tags coming on the market, buyer demand may ease up, too, as Americans return to life as normal. Those previously focused on moving might shift their attention to taking trips and attending events. Others who were hesitant to sell amid the pandemic will get around to listing their homes for sale. The combined result could dampen competition among buyers, further driving down home prices deemed unattainable and unsustainable by many.

“A more balanced market could encourage more move-up homeowners to finally sell, because they won’t be so fearful about being able to find and compete for a home to buy,” said Redfin Chief Economist Daryl Fairweather.

But some experts disagree, citing an imbalance in supply and demand that won’t even out anytime soon. Per The Columbus Dispatch, “The U.S. population, and particularly the generational bulge of millennials entering their 30s and starting households, is growing faster than the number of homes available. That means that even as wood prices come back to earth, home prices are unlikely to follow.

What Elevated Lumber Prices Mean for Rehabbers

According to Dustin Jalbert, an analyst with Fastmarkets, “People should know that [lumber] prices are probably not going to fall to the levels that they were before the pandemic.” And despite the price drop seen in June, it will take several weeks to be reflected in the cost of wood at retail home centers, Jalbert told NPR.

It’s not the news homeowners looking to renovate and investors intending to rehab were hoping for. Complicating matters further, many appraisers aren’t recognizing the surge in wood costs during the appraisal process.

Per the National Association of Home Builders, “This applies not only to lumber, but appliances and other key components, as well, due to supply constraints. Because these increased costs are not recognized during the appraisal process, the builder or home buyer is often left scrambling to secure extra funds to cover the difference between the appraised value and the actual cost of the home”—a hurdle BRRRR investors poised to refinance will similarly face. 

NAHB recommends creating an “appraisal binder” with a cost breakdown of the materials used during building and renovations, then providing it to the appraiser upon arrival at the home. This “will help encourage the appraiser to apply the cost-approach method during the appraisal process, thereby reflecting the cost of materials used to construct the home.”

To further mitigate the effects of lumber prices on reno projects, experts suggest that rehabbers:

  • Use accurate material costs when evaluating the profitability of a fixer-upper investment.
  • Get lumber prices directly from framers prior to beginning a project.
  • Beware of underbids from general contractors (or risk a surprise escalation in price to cover material costs after signing the contract).
  • Take on renovation projects once the home-building season slows and lumber demand lessens.
  • Plan for unforeseen expenses when creating your renovation budget.
Lumber Prices 2019-2021
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