Why has the cost of building materials skyrocketed!? Is it Covid related?
Lately we have been getting some pretty emotional responses for the changes in the cost of building and remodeling. If you’ve found this post then you’re probably asking the same questions we get every day:
- “Why are you expecting this (project) take so much longer?”
- “Why has lumber gone up so much?”
- “I just had this same job quoted last year, how is this is more than triple the cost?”
- “What do you mean you can’t give me a quote at all?”
There really isn’t a single smoking gun to blame. It’s a combination of compounding factors dating back to 2018 for supplies and even 20+ years ago if you want to talk about labor costs.
So, what happened?
If you haven’t already heard, there is a housing shortage for most of the country. Resale values are through the roof as inventory remains low and financing remains affordable for most first time home buyers. Additionally, the demand for new construction is at an all time high. To date, Lumber is up about 340% from a year ago, according to Random Lengths, a wood products industry tracking firm. Keep in mind that this means more than just the stud walls in your home. This also affects your kitchen cabinets, doors, flooring, even baseboard, crown mouldings, and it’s not limited to lumber. Other trades are seeing spikes in building material costs as well, drywall is up more than 7% for raw materials and we’re are personally seeing labor cost nearly double.
Shrinking Supply
Import and export tariffs from 2018 began a trade war between the US and China. Since we export lumber to China and import furniture, flooring, and other finished good from China, these tariffs began to drive lumber costs before COVID-19 entered the picture. In 2018 this was 10% on furniture-like imports from China and 25% on logs and lumber exports to China. In theory this would be good for domestic production and encourage more US-based manufacturing. Sounds good, so what’s the problem? Well the problem here is labor costs. It’s no secret that US labor wages are significantly higher than that in China, hence, the rising costs of finished goods. The second part to that would be the time it takes for new manufacturing plants to open up shop and start producing. This doesn’t happen over night and It definitely doesn’t happen in the middle of a global pandemic.
Then, a little more than a year ago, Covid-19 lockdowns started to squeeze manufacturing all over the world. Lumber yards and factories that make building materials were faced with all kinds of restrictions. Everything from social-distancing requirements, sanitizing, quarantines, and sick employees (some that tragically never returned to work) put a strain on production. Many companies halted production, some shutdown indefinitely or just went bankrupt. This “lockdown effect” touched every single link in this long chain of raw material to final purchaser. If you stop to the about every single step it takes to get a single piece of 2×4 lumber from “farm to table” so to speak, there are a lot of steps and it’s a pretty impressive process.
Couple that with a short pause in real estate sales and new home production and you get a very very low supply of building materials. It makes sense, if there’s no demand (and fear of falling demand) manufactures don’t need a surplus of inventory.
A Surge in Demand
The global fear of a crashing economy, specifically in the housing market, only lasted long enough to hurt production and further the shortage of housing in the US. One would think that the spike in unemployment and job loss as a result of the pandemic would tank the economy. Surprisingly, first time home buyers’ borrowing ability didn’t change all that much.
What does that mean? People are still buying houses. In fact they are buying faster than the construction industry can build and buyers are getting into bidding wars on existing resales. If you have been shopping the market this is not news to you.
How is this possible?
The federal reserve has kept interest rates low (which means better rates for loans) and the government has provided subsidies for people that are out-of-work due to the Corona Virus pandemic. These are good things but the old adage rings true; no good deed goes unpunished. This subsidy will run out very soon, and if the economy doesn’t get back on track, there may be a small “knee-jerk” recession for the loans that were written during the pandemic but I don’t think it will be anything like the crash we saw in 2008. I’m no economist, I’m just thinking in terms of common sense. If you don’t have a job to pay your bills after the stimulus runs out.. you’re probably not going to be able to pay your bills thereafter.
The Great Labor Crisis of 2021
I plan to write another post about the vacuum of skilled labor that has been created since the college degree scam became an issue in the US, over 10 years ago, but I’ll save that for another time.
The real issue: skilled labor is getting paid to sit at home right now.
Straight from the horses mouth I have employees that literally say to me “I can work 4 days, but anything over that and I lose my stimulus money.” – this is no lie, a direct quote and I have several similar quotes from skilled laborers.
I am hearing that the restaurant industry is suffering from the same issues. I have no idea if this is true since I know nothing about the restaurant industry.
Red Tape
The government is rarely known for it’s speed and efficiency. What many home-owners don’t account for is the time invested in just the paperwork burden for a remodeling project. The drawings, permitting, official record filings, public notary fees, and back-office costs aren’t any different than pre-pandemic processes but, for reasons unknown, they have gotten more expensive and typically take longer. City and local government operations screeched to a halt at the beginning of the pandemic and are only just now opening back up to full operational status. Still, the turnaround time for permits in our areas is longer than it was a year ago.
“Why is this project so much more expensive than it was last year?” – Simply Supply and Demand.
Well, raw materials are up almost 4x what they were a year ago, I can’t get people to show up to work and the ones that do I’ve been able to keep want to work 4 days a week. Additionally, my phone is ringing off the hook and I’m turning down work because we are simply booked out for months at a time. Supply and demand.