Wait Until Next Spring to Replace Your Deck
Lumber prices at the store are about to collapse
At the outset of COVID-19 when it became clear that this was not a two-week or even a two-month issue, the world girded itself for turmoil if not outright economic collapse. To the surprise of many, however, in certain sectors of the economy the exact opposite happened: demand surged and prices spiked.
Nowhere has this been more true at least in the United States than in the residential construction market. Suddenly stuck at home, people started noticing all of those long-deferred renovation projects. Others built home offices or decks and patios. A migration of people from the cities to more rural areas of the country sparked a homebuilding boom. And since people couldn’t spend as much money on travel, eating out, and other forms of entertainment, they had more money to spend on their homes. All of this activity was boosted by multiple rounds of federal stimulus dollars and generous relief programs for business owners, which have had Americans feeling cash-rich and ready to spend even amid the uncertainty of a global pandemic.
The prices of building materials like lumber, copper, and aluminum surged throughout 2020 and for much of the first half of 2021 thanks to robust consumer demand. COVID-related supply chain issues played a major factor too as it simply became harder to do business both globally and locally due to COVID restrictions, a contracted labor pool, and just the general frustrations of trying to meet consumer expectations amid a global pandemic. Weirdly atypical things happened too, like a giant boat getting stuck in the Suez Canal, which disrupted supply chains globally.
But a lot of this is starting to settle itself out. Lumber mills have ramped up production to meet such strong demand, for example, and there is plenty of anecdotal evidence that consumers are pulling back from some projects in the face of sky-high prices for materials. These reactions and market adjustments will lead to lower prices. And once the momentum cools on a rapidly rising asset price, the subsequent drop can be just as sharp. On this point, the three-year chart for lumber futures is something to behold:
It is important to note, however, that the chart above represents lumbers futures. Futures are a technical investment term that for all intents and purposes reflects future expectations of prices, say, a year from now. Futures don’t necessarily represent the price of 1,000 board feet of lumber at Home Depot when you stop in on Saturday morning to buy wood for your next home renovation project, however. Prices at the store are still high.
This week I spoke to someone much more knowledgable than I about how lumber is priced to get his perspective on the current market. He asked to not be quoted by name because he works for a local lumber company and is not authorized to speak on behalf of the business, but his perspective was essentially that all of these lumber sellers have purchased up huge amounts of product over the past few months at high prices that they now need to sell. Fortunately for them, consumer demand remains strong enough that they can still sell it at healthy margins and make a profit. But in these companies’ next round of buying themselves, they expect to pay lower prices from the lumber mills and wholesalers they buy it from, which will then be reflected in lower prices for the consumer at the store especially as the different stores try to undercut one another in the endless competition for customers (a lesson right out of an Economics 101 textbook).
The point here is that while lumber futures are down dramatically, it might take 6-8 months for prices to drop at the stores. But they will come down. If a typical deck project costs $20,000 at first-half-of-2021 prices, it might cost $10,000 next spring once the price of lumber has dropped. This is, of course, barring a rebound in lumber prices over the next six months. I just don’t see that happening, though. The lumber market has been in an irrational frenzy. The bubble is bursting and prices are reverting or will revert to their historical level over the next few months.
One final point, labor is also hard to come by right now simply because there is so much work for contractors and home builders. I work with a lot of business owners and real estate investors who need to have work done, and the prices that contractors are charging have gone up and up. A big part of this is, of course, that building materials are more expensive so contractors have to pass that cost along to the customer, but another factor is that construction-related services are in such high demand that contractors can charge almost whatever they want and not run out of jobs. This, too, is basic supply and demand: when the supply of labor is limited and demand is strong, the price for that labor will rise.
I’m not saying that in the spring of 2022 every construction contractor and homebuilder is going to be sitting around twiddling their thumbs. There is good evidence to suggest that the current home-building boom has legs to run. But I think activity will ease off just a bit, especially in the late winter and early spring of 2022. That is when I predict prices will be lower both due to materials costing less and contractors being more available and at more modest prices.
So my advice: unless you have structural issues to your home that require urgent attention, wait until next year for your renovation projects. Lumber and other building materials will be cheaper, labor will be looser, and the frustrating supply chain issues that are plaguing so much of the economy will have mostly settled out by then. Having patience now could save you thousands if not tens of thousands of dollars for a simple home renovation project or a new deck. If you’re building a new home the savings could be even more.
Ben Sprague lives and works in Bangor, Maine as a V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram and subscribe to this weekly newsletter by clicking above.
Weekly Round-Up
Here are some things that caught my eye this week:
Ali Wolf writes in the New York Times about how the current housing market is most advantageous to wealthy buyers to the detriment of local buyers in lower-income areas of the country:
The housing rebound has been fueled by buyers whose wealth allowed them to win bidding wars, often with a high down payment and a bid over asking price. Those living on local incomes, which are often modest compared with those of relocating newcomers, are losing the ability to buy a home as competition grows and prices rise. In the long run, this means some Americans will be able to build wealth in their homes, leaving the rest behind.
Robbie Feinberg of Maine Public writes about the lack of affordability for renters in Maine, which is also noted by Connor Sen nationwide:
The Global Law and Business Podcast picked up on one of my recent articles about lumber prices:
In response to my article about the first half of the year for various materials and asset classes, I wrote that consumers generally do not want higher gas prices. Bowdoin Associate Professor of Economics Daniel Stone tweeted that from a climate perspective, higher gas prices can actually be good. Food for thought:
Eleanor Beardsley shows a picture of WWI trenches in France, which have been long-overtaken by grassy fields:
Thanks for reading, everybody. Have a great week.
Got news tips or story ideas? Email me at bsprague1@gmail.com.