Lumber Prices Are Higher Than They Appear
While prices have dropped 50%, the prices for builders are a fraction of that amount.
After a massive run-up last Summer and periodic spikes since then, lumber prices headed back to earth in mid-June.
Yet, the National Association of Home Builders says lumber prices are still higher than they appear. While data from Random Lengths shows that the cost of framing lumber has dropped roughly 50% over the past seven weeks, the association says prices paid by builders have declined by a fraction of that amount. In fact, it says the prices quoted to builders are at record highs.
NAHB cites the supply chain as a significant reason for that disconnect. The issues are dealers’ inventory carrying costs and potentially significant differences between the price at which inventory is bought and sold. Retailers and wholesalers try to avoid losing money by buying high and selling low.
NAHB says suppliers’ inventories become tight when prices are falling. They want to run through that inventory as quickly as possible to get close to what they paid for it while not harming relationships with customers. As a result, they will be reluctant to take on more inventory for fear of ending up with a load of inventory on which they will take a loss.
However, once prices have decreased for a while, that will eventually be passed onto builders. NAHB says prices must fall for long enough to materially lower a supplier’s average costs after a run-up. Ultimately, it could take a few weeks to a couple of months after the initially reported price decline for builders to enjoy price relief. The length of the waiting period depends on several factors, including builder size, supplier size, and the specific builder-supplier relationship. Relationships can also influence this timing.
When prices are increasing, those changes reach the builder with a shorter lag time. The NAHB says wholesalers tend to be “trigger happy” when prices jump, quoting prices near or at market levels with the cost of their inventory low relative to cash prices.
Retailers often have less buying power than wholesalers have selling power, according to NAHB. Often retailers’ costs increase with market prices.
“These higher costs are passed on to builders in order to maintain positive operating margins,” according to NAHB. “Thus, lumber retailers are less likely than wholesalers to realize outsized profits when prices are rising.”