Supply and demand of building materials

By: J. David Chapman/March 18, 2021

Housing has been an economic bright spot amid the COVID-19 pandemic. However, the industry’s potential to lead the economy forward is limited as long as building materials remain expensive and scarce.

I have witnessed builders trying to do everything possible to avoid pricing consumers out of homes while maintaining competitive prices necessary to operate their business. The rising cost of building materials is harming the affordability of housing as the cost and limited supply of lumber, steel, aluminum, and other materials and equipment exacerbate price volatility and drive costs up. We provide temporary housing to those building homes. Almost 100% of our guests end up extending their stay because their homes are not completed on time. Builders report the reason for this extension is lack of access to supplies.

Builders have indicated to me that they are hesitant to begin new projects right now due to uncertain time frames on completion and costs of construction on larger projects. They report construction delays on current developments and supply disruption on materials. Some builders and brokers are reporting customers walking away from potential projects due to the extended construction times and escalating costs. Lastly, and maybe the most irritating issue of all, is the failure of the home to appraise for the sale price by the appraiser. I have had two existing home sales bust, after receiving multiple offers, because the appraiser missed the value by a significant amount. Without a proper appraisal, the buyer or the builder/owner is left trying to bridge the gap between the appraised value and the actual sales price.

Lumber prices are now about 112% higher than they were a year ago and continuing to increase. The blame is a simple supply-and-demand contribution because of COVID-19. According to the U.S. Census, single-family housing starts are up 30% year-over-year, creating the increased demand. On the supply side, both the mill operators and lumber dealers misread the 2020 market. Because of a lackluster 2019 market in housing starts and remodeling, they pulled back on production, expecting 2020 to be the same. Then came the unexpected boom in both housing starts and remodels, creating this massive supply and demand gap. Secondly, suppliers had a hard time ramping up production because the pandemic made production difficult complying with shift work requirements and social distancing rules.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).