Here’s some welcome news for real estate investors: lumber prices, which soared to stratospheric levels over the past year and hit new record highs in May, are starting to come back down.
The drop in prices is a sign that the commodity prices and labor required for construction are starting to stabilize after a volatile year, a trend that will hopefully continue.
Prices are falling for a combination of factors, all driven by the basic principles of the economics you learned about in high school: supply and demand.
Demand has started to fall, likely due (at least in part) to higher prices of lumber leading to postponed projects. New home construction in May was down nearly 9% from March when the country hit record highs in new housing starts. Home improvement sales are also down more than 8% in the same timeframe.
With demand lowering and production returning to pre-COVID levels, there’s more lumber available. In addition, businesses that stockpiled lumber to keep up with demand during shortages now are unloading their lumber to avoid taking a loss.
While it may take some time for lower prices to trickle down to real estate investors, the promise of lower prices for materials makes starting a rehab or new home construction project far more attractive.
Although prices have started to fall, lumber is still very expensive, in some cases more than double what they were in spring 2020. Still, many experts believe the downward trend will continue into next year.
As a real estate investor, there are a few lessons to take away from these ups and downs. For starters, people tend to create self-perpetuating problems. Consider the great toilet paper crisis that followed the rise of COVID-19, creating shortages when there was actually plenty of toilet paper to go around and the use of toilet paper had not actually increased.
There were genuine shortfalls in lumber supplies due to mill closures and producers slowing down production in anticipation of a possible housing market crash when we didn’t know how COVID-19 would affect the home building industry. No one knew at the time that the pandemic would spike demand, with homebound homeowners undertaking improvements and the demand for housing reaching new heights in a locked-down world. The situation was made worse by hoarders who stockpiled lumber to ensure enough for their own needs, driving up prices and creating scarcity.
Now, we are entering a new phase as the pendulum starts to swing in the other direction, and commodity prices and the supply of materials such as lumber, bricks, and factory-made items like cabinets and windows seem to be stabilizing.
Perhaps the most important lesson from all of this may be accepting uncertainty.
Everybody wants a guarantee that things will turn out the way they want, but we are living in an uncertain world. This is especially true post-COVID after nearly every aspect of the economy ventured into uncharted (but in many cases, very favorable) waters. No one has a crystal ball to know for sure where things will go next.
Despite the fact that we all must live with uncertainty, there are ways to mitigate risks. For example, for the past year, new Corridor Funding clients have added 20% to their rehab budgets on contingency, to cover the volatility in material prices.
Also, factor in the bigger picture. Here in Texas, as in many markets throughout the country, demand for housing is still strong, as are the market fundamentals such as job growth, people relocating to the state, and an influx of businesses moving here.
As an investor, if you take calculated risks, plan well, and purchase new properties carefully, it’s possible to do well even in an uncertain world. Maintain your focus on finding good deals that will allow you to be profitable in a fix-and-flip or BRRRR (Buy-Rehab-Refinance-Rent-Repeat) strategy.
When you find it, Corridor Funding is here to help guide you through the process.
- Based on current trends, the recent price drop in lumber indicates that the commodities and labor required for construction are beginning to normalize.
- Demand is still strong, especially here in Texas. The housing boom is not dramatically slowing down due to high lumber prices, and should be fueled by lower material costs.
- With continued strong demand and careful investment in properties, investors in residential real estate can expect to do well, even with higher than normalprices for lumber and other materials.
- Uncertainty is the only certainty in this world. Mitigate your risks by making wise purchases and planning for volatility in material prices.
- Be aware of market cycles and plan accordingly. Don’t let a temporary situation like higher lumber prices keep you out of investing altogether – despite higher construction costs, demand remains strong, creating an environment where a renovated home can be even more profitable. Consider all the variables.