July 2013 Whole House Commodity Index

July 2013 Whole House Graph


by Don Magruder, CEO of RoMac Building Supply

The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index for July increased 0.2% to $29,132.99, due primarily to the strength of popular lengths of dimension spruce and pine. In April, the Index hit its all-time, eight-year record high of $30,023.64. Since that point, it decreased 2.7%, but interestingly, the Index has priced out within a 2/10 range since May. This is not to say that lumber commodity pricing hasn’t dropped since May, but it is an indication that other material scopes have increased in price. A strengthened wood commodity market will have a greater impact on the Index in the future.

May’s Index cost is 5.5% more since the end of 2012 and it is 8.1% higher than last July. Something to consider is that in 2012 the cost of the Index increased 4.3% and I believe it is poised to follow that direction again. Here is my reasoning.

  • Inventories on the ground are woefully low and the recent activity in the lumber and plywood market indicates that purchasing managers understand that costs are probably at the bottom of the cycle. Concerns about a minimal drag in housing due to higher interest rates will be offset by a steady demand in most areas.
  • Trucking is a problem for many areas and the last two weeks of fuel cost increases will not make that get any better.  Hand-to-mouth inventories can create real hunger in the supply channel if there is an inability to have the product delivered to dealers.
  • Rain in the south has been unmerciful for nearly a month and log decks will dwindle. Historically, long-term rain patterns affect supply, especially in wider-widths. Stronger truss production in Florida will put added pressure on southern pine markets over the next few months.
  • Many dealers have a growing weariness about supply. While there may not be shortages in various supply scopes in the building material supply chain, there are definitely shipping delays and much longer lead times. Impatient builders may be changing the minds of reluctant suppliers in regard to bolstering inventory levels. Understand, whether by trucking shortages, increased housing demand, or general inventory growth, there appears to be a move away from hand-to-mouth inventories.

There were not many notable cost moves for this month’s Index, but here are the highlights.

  • CDX plywood was down 6.2% and OSB sheathing dropped 16.5%. However, the last two weeks have firmed up in both lines and this should entice buyers into the market, which could drive pricing higher.
  • 2×4 #2 yellow pine was up 2.8% while 2×6 pine dropped 2.7% and wider width 2×12 pine settling down at 7.9%.
  • Spruce studs increased by double digits on higher demand and 2×4 dimensional spruce gained 4.7%. Wider 2×6 spruce gave back 2.9%.
  • Interior and exterior doors decreased less than 1% on more competitive commodity moulding pricing.
  • Truss prices were up 2.9% on high narrow width pine and increased costs in labor.

Most items in the Index remained static, but expect higher pricing in shingles over the next month or so, as those manufacturers have announced August increases. Also, expect higher pricing for door and window scopes, due to higher labor and delivery costs.

The biggest problem on the horizon is a shortage of skilled labor. Good subcontractors are highly sought, and many of them are now in the situation of being able to selectively choose jobs instead of searching for work. This week alone, I have been told of multiple stories of subcontractors firing builders for low pay or poor working conditions. Also, there is a real battle for these subcontractors to retain their skilled people. Excellent masons, framers, plumbers and electricians are being paid more and recruited heavily.

For the past five years, builders have fully been in the driver’s seat when it comes to demanding lower prices from subcontractors and suppliers. During that period, many folks in the trades believed that some builders took advantage of a very difficult economic situation. It appears that dynamic is quickly changing. Look for many good subcontractors to fire builders because of hard feelings and low prices as the labor shortage continues to grow.

This is how I can best explain the labor shortage issue. For the last six years, there have been no jobs available in the construction industry and the industry has lost six years of hiring and training the next generation. During that period, there have been a bunch of white-haired skilled craftsman retire or die, which has resulted in a huge brain drain, especially since they had no one to teach. And, about half or more of the workers in our industry lost everything and now are working in other areas with no desire or will to come back. Toss in the fact that most technical schools and colleges have abandoned construction trade training because of the lack of jobs and you now have a huge problem that will take years to resolve.

Here are my two big pieces of advice to builders this month:

  • If you have great subcontractors working for you, be prepared to defend your position. If you are a builder who has a reputation of brow-beating subcontractors down on price and then nickel and diming everything to setup a back charge, good luck finding good people. If you have a great subcontractor base, you better love and care for them because they will have options and the cost of business is going up. Hesitating to approve a subcontractor increase will send that subcontractor to your competitor.
  • A lot of issues are breaking for higher prices, so I expect pricing to go up in the third quarter. It appears the commodity markets have cemented a bottom and higher fuel cost typically leads to a pop-up in pricing. Builders should update quotes and have price escalation clauses in their contracts. If you would like a sample of a free price escalation clause for your contract based on this Index, contact Rebecca Ballash at rebecca.ballash@romaclumber.com. Please consult with your attorney before adding anything to your contracts.

Don’t forget the country is less than a month a way from the teeth of hurricane season and a bad storm could quickly change the dynamics. This is the time builders need to protect themselves because the markets could turn very ugly in material cost and labor availability.

The Ro-Mac Lumber Whole House Commodity Index is based on wholesale costs of the base components to build a 2,200 square foot wood frame home with a concrete stem wall in Central Florida.  The Index includes foundation, metal, concrete, block, stucco, cement, wood framing, siding, sheathings, trusses, roofing, drywall, insulation, windows, doors, trim, garage doors, and most building hardware.  It does not include décor, electrical, plumbing, mechanical, landscaping, or labor.  Because the Index uses current wholesale costs, this should be a strong indicator of the direction of building prices for the next 30-45 days.

Don Magruder is the Chief Executive Officer of Ro-Mac Lumber & Supply, Inc. in Central Florida. Go to romacfl.com to sign-up for the Index and other free market reports.  To sign-up for this information via email, contact Rebecca Ballash at rebecca.ballash@romaclumber.com.