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To say that the homebuilding industry has a lot going against it right now would be quite an understatement. It is currently in the midst of one of its most protracted downturns in memory. The industry is currently dealing with several issues, including a lack of demand for new homes, a sizable supply/demand imbalance, rising foreclosures (distressed properties are a serious threat to new home sales), tighter lending standards by banks following the subprime meltdown in 2008, and a very weak labor market. The latter has kept many buyers out of the market for a home.

With the aforementioned issues in mind, it would be a safe bet to say that the builders are none too pleased about the recent uptick in the price of lumber, a key material used in the production of a home. The skyrocketing price for the commodity (discussed below) has hurt what were already very depressed building margins. Even the most prolific and financially sound builders-- PulteGroup (PHM), D.R. Horton (DHI), Lennar Corp. (LEN), and Toll Brothers (TOL) -- which are often able to negotiate favorable contracts with their suppliers -- have not been able to offset the negative impact of the higher lumber prices. The nation’s largest homebuilders are trying to make up for the elevated price of lumber by reducing labor costs.

The sudden and unexpected surge in lumber prices contrasts with the recent declines witnessed in many other commodities, as inflationary pressures have not had much of an impact on prices in recent years. As of March 19th, the price of lumber per 1,000 board feet was $312, up sharply from $190 recorded on January 30, 2009. A study by Purchasing Magazine, which tracked the price of nine lumber products, found that spot prices for lumber have risen 23% since April of 2009. Unfortunately, from a homebuilder’s perspective, this trend will likely continues, as the price of lumber futures continue to rise.

The significant appreciation in lumber prices can be traced to a few factors, most notably a supply shortage. The smaller inventory is the direct result of nervous U.S. and Canadian mills cutting production when the housing market began to tumble. Manufacturers that didn’t want to be stuck with excess lumber products decided to scale back production of the commodity. The decision resulted in lumber output falling 45% from the peak level witnessed in 2005 when the housing market was operating on all cylinders. This problem will not be solved overnight either, as many of the lumber producers lack the necessary capital right now to restart their shuttered operations.  In fact, Weyerhaeuser Company (WY), the world’s largest private owner of softwood timberlands, continues to report sizable quarterly operating losses.

The price of lumber can vary widely, as it is often based on a number of factors in addition to the supply/demand scenario. The type of wood impacts the price, as cherry and oak are more expensive than pine. Treated wood is also priced higher than untreated pieces. Moreover, the price of lumber depends a lot on where the purchase is made. Often purchasers may get a better quote at a lumber liquidator that specializes in the commodity than at the giant retail outlets like Home Depot (HD) and Lowe’s Companies (LOW). 

In conclusion, the rising price of lumber will continue to have a major impact on homebuilding margins, as the commodity is a primary material used in the production of a new home. This, along with the fact that home values and the average home selling price remain very depressed, will probably make it difficult for the homebuilders to return to profitability over the next six to 12 months.