Soaring building costs have been front-page news for more than a year. One doesn’t need to be planning a remodel or designing a new home to be aware of such things. My mother-in-law (who is pretty savvy I will add), said “Austin, did you know that Home Depot’s ¾” plywood is up from $35 a sheet a year ago to over $90 today!” The pricing of lumber and building material has been causing concern and disruption in our sector since the start of COVID. The following sheds light on some of the various factors effecting the industry’s current climate.
To start I don’t believe the price increases are necessarily a nefarious price gouge from some powerful executives. Although some greed may have had a part in this. I believe it’s simpler, and goes back to age-old economic principles of Supply and Demand.
When COVID-19 was just starting and the country was unsure about the normalcy of the everyday life, lumber mills and plants slowed or shut down expecting a decline in demand of their goods (and in protection of their people’s health). This was the first factor and start of issues, turning off the supply spicket. Reduced inventory.
Shelter-in-place and quarantining lead to extra time at home. That time we had staring at our outdated kitchens or undersized family rooms sparked us to action. We called contractors and the DIY’s took Home Depot and Lowes by storm. As the demand increased, the mills tried to open and increase supply to meet demands, but COVID was indirectly or directly keeping the producers closed or at reduced capacity. Demand large and Supply small.
A client asked if we could replace the high cost of Southern Yellow Pine (SYP) with Spruce or Fur. On the surface it made sense. The idea of replacing a good with a like good. AKA a substitute good. The market reacts quickly and puts the same constraints and conditions on those substitute goods quickly evening the playing field. In this example the other wood species pricing caught up almost instantly. Furthermore, as the country imported more goods, the tariffs added additional cost to the already scarce products.
On a local level it’s more extreme. Many of us have never seen anything like the growth we have experienced in the last 12-18 months. The movement started before COVID and accelerated with it. COVID restrictions spawned the home place as the new work place. It opened many people’s eyes to working remotely. If we can work at home, why not work at the beach? Even if moving fulltime to the Outer Banks is out of the question many wanted the option to come stay at their own place and take advantage of the strong rental market the rest of the year. These factors on top of the already strong and healthy building economy of the OBX put further demand on the already stressed work force.
The Outer Banks is not only unique in its beauty, but in its geography and how that effects the labor force. Our economy is slowly shifting to a more year-round one, but it’s still lacking. Our industry is less ranging drawing fewer potential applicants to the area. We have very limited access to workers. The increased labor demand and reduced supply of workers add to the increasing home costs.
Returning to a national component, interest rates are historically low. Many have planned their retirement home, or investment home, for years and want to take advantage of the cheaper money. An investment banker I am working with believes today’s rates will outweigh today's building cost in the long run and is choosing to build now. More demand.
The full extent of the Pandemic and how it will affect the building industry is still unknown. As we attempt to turn the corner and return to normalcy there have been signs of stabilization, thankfully increasing signs. However, in my opinion, until the supply of building materials (specifically lumber) equals or exceeds its demand, prices and building costs will remain high.