Here is some good news for real estate investors. Lumber prices are starting to fall down, rising to stratosphere levels last year and reaching new record highs in May.
The price reduction indicates that material prices and labor requirements for construction are beginning to normalize after a turbulent year, a pattern that should continue.
Prices are decreasing due to a variety of causes, all of which are driven by the fundamental economic principles you studied in high school: supply and demand.
Demand has fallen due, perhaps (at least partially) to rising lumber prices which have led to projects being postponed. In May, the new house was almost 9% lower than in March when new housing set historic highs. Domestic sales likewise decrease by more than 8% in the same period.
There is more wood available with decreased demand and production reverting to pre-COVID levels. Furthermore, companies who store wood to meet demand while they are limited now dump their wood in order to prevent loss.
The promise of decreased pricing for materials makes it considerably more enticing to start a rehabilitation or new housing project while reducing prices for immobilizers.
While prices have begun to decline, the cost of lumber is still high, in certain circumstances more than double that of spring 2020. However, a lot of analysts think that the negative trend in the following year would continue.
As a real estate investor, you may learn a few things from these ups and downs. To begin with, humans have a tendency to generate self-perpetuating issues. Consider the big toilet paper problem that followed the emergence of COVID-19, causing shortages despite the fact that there was plenty of toilet paper to go around and toilet paper usage had not increased.
When we didn't know how COVID-19 would affect the house construction business, there were actual timber supply shortages due to mill closures and manufacturers delaying output in preparation for a probable housing market meltdown.
Nobody realized at the time that the pandemic would cause a surge in demand, with homebound homeowners making renovations and housing demand reaching unprecedented heights in a closed-down globe. Hoarders who hoarded lumber to secure enough for their personal purposes exacerbated the problem, pushing up costs and increasing shortages.
Now, as the pendulum begins to swing in the opposite way, commodities prices and the supply of materials such as timber, bricks, and factory-made products like cabinets and windows appear to be stabilizing.
Accepting unpredictability may be the most essential thing to take away from all of this.
Everyone wants to know that things will turn out the way they want them to, yet we live in an unpredictable world. This is especially true in the aftermath of COVID when almost every area of the economy traveled into new (but sometimes extremely beneficial) seas. Nobody has a crystal ball to predict where things will go next.
Although we must all live with uncertainty, risk mitigation may still be achieved. For example, in the last year, new Corridor Funding clients have added 20% to their rehab budgets as a contingency to account for fluctuating material prices.
In the larger view, too, factor. The demand for housing is still strong here in Texas, and also in a number of markets throughout the country, as are the fundamental market principles such as employment growth, the relocation of individuals to the state, and the flood of companies migrating here.
As an investor, even in an unpredictable environment, you may do well when you take measured risks, plan and acquire new assets wisely. Keep focusing on finding good offers that can help you benefit from a Buy-Rehab-Refinance-Rent-Repeat or BRRR approach.
When you find it, Corridor Funding is here to help guide you through the process.
Key takeaways:
- The recent price fall in timber suggests that the commodities and work needed for buildings are beginning to normalize, based on existing patterns.
- Demand is robust, here in Texas in particular. Due to high timber prices, the housing boom is not slowing drastically and should be fuelled by cheaper material costs.
- Investors in residential properties may expect to earn well with continuing high demand and cautious investment of property, even with costs for timber and other commodities higher than typical.
- In this world, insecurity is the only certainty. Mitigate your risk with rational procurement and material price volatility planning.
- Know the market cycles and thus plan. Don't let your investment in a transient scenario like higher prices for wood - despite higher building costs, demand is still robust and creates an atmosphere where rehabilitated homes maybe even more lucrative. Take all the elements into consideration.
