Lumber market is out on a limb
Jim Buchta, Star Tribune
September 25, 2004
No time is a good time for a hurricane, let alone three and a possible fourth. But the timing couldn't be worse for the construction industry.
With home builders predicting another record year for new construction, companies that manufacture and distribute building materials are running at full tilt. That's why Jerry Howard, executive vice president and CEO of the National Association of Home Builders, says that nationwide, the industry -- which expects to build more than 1.7 million houses this year -- will feel the full brunt of the hurricane season.
"It's a unique confluence of events that we believe is going to have a significant effect on home building," he said.
Insurance companies, engineers and homeowners still are assessing the damage, and homeowners still are filing claims. But once the checks are cut and the contractors are hired, Frances & Co. could cause mayhem even in the Midwest, and home builders could end up absorbing the impact.
Wood’s as good as goldLumber prices are of key concern now, but Howard said companies that manufacture all kinds of building materials -- including insulation, wallboard, bricks and cement -- already are operating at full capacity. As demand increases, prices are sure to follow.
Through the year, supplies of wallboard products, cement and insulation have been tight in large part because demand has been so strong for so long. And at the same time that the lumber industry has been trying to limit imports from Canada and other foreign producers, shiploads of cement, insulation and other materials are headed for distant shores such as China, which also is in the midst of a building boom.
Wood prices are near historic highs. The weekly framing-lumber composite price Wednesday was $417 per thousand board feet, and the average for all of last year was $311, according to a survey from Random Lengths, which has tracked lumber prices for more than five decades.
Structural panel prices for sheet goods such as oriented strand board and plywood are near record highs, too. According to that mid-week price report, the panel composite price was $471 per thousand square feet, up from an average of $367 during 2003. Panel prices peaked in April at $610 per thousand square feet; framing lumber rose to a high of $473 per thousand board feet in August.
"Our experience is that it's weeks or months downstream before people get a check from insurance companies and actually begin to get in gear rebuilding some of the damage," said Joe Heitz, associate editor for Random Lengths. "So we don't see any immediate market impact."
Heitz offers a simple theory about why lumber prices have dropped in recent weeks: Production has outstripped demand. Those falling prices are chasing away speculators and others who otherwise might be stocking up for the spring construction season. At the same time, many wholesalers, distributors and dealers are focused on reducing inventories, he said.
"People are afraid to own wood when the market is falling," Heitz said. "What they own today is worth less tomorrow, and they become very, very cautious about buying."
For now, there's no sign of any lumber shortages in the Midwest, according to several Twin Cities-area builders. But Rick Kot, president of the Builders Association of the Twin Cities, and others say they're bracing for higher prices.
Scott Richter, Minnesota division president for Centex Homes, is doing the same. He said the company already has seen "drastic" increases in lumber prices unrelated to the hurricanes. He now is paying 30 percent more for most products, which translates into an increase of $3,000 to $4,000 in the cost to build a 2,200-square-foot house, not including millwork, cabinets and other wood details.
"Builders will have to eat that," said Howard of the National Association of Home Builders. "It will be more expensive to build in the short term but not more expensive [for homeowners] to buy."
Most houses being built or awaiting construction are under contract, so builders can't make up the difference on those houses. And with the higher inventory of houses for sale and buyers being more budget-conscious, builders aren't in a good position to raise prices, Richter said.
"To some degree, I guess you raise prices when you can," he said. "But I don't think most builders are able to raise prices quickly enough to cover all those costs."
Predicting just how much damage will be inflicted on the construction industry is difficult to predict. History says it could be several months before the full impact is seen, but history might not be the best indicator in this case. Hurricane Andrew, which caused more than $26 billion in damage more than a decade ago, came ashore when the housing market wasn't so robust and demand for building materials wasn't so great.
"When you take into account the rate at which home building has been going on in the country and you add to that the impact that these hurricanes are expected to have," Howard said, "we're facing a potential problem in the coming months."
Jim Buchta is at jbuchta@startribune.com. |
