If there is to be an inflationary force on the horizon, it could very well come from shortages in materials and commodities. Strong price gains are particular in softwood lumber. The 3-year chart below is the price of 1000 board ft of random length softwood lumber.
If anyone went to a Lowe’s (LOW) or Home Depot’s (HD) lumber department over the summer, you would have noticed both the lack of lumber supply and the price increases. Standard 8ft 2 x 4’s were going for over $6 when they were under $3 not that long ago.
Covid scare coupled with shelter in place orders caused a lot of lumber mills to shut down over the course of 2020 hitting lumber supply.
In today’s economy, there has been a great change in demand for commodities. On one hand, gasoline demand has been hit hard. On the other hand, demand for lumber is red hot.
To best give justice to the demand for lumber, below is a chart of new home sales. Demand for single family housing outside of cities is what is driving sales.
First, the company noted this:
In the first 6 weeks of our quarter through December 6th, our non-binding reservation deposits, which are a precursor to contracts, are up approximately 48% compared to 1 year ago.
Demand has continued to be very strong in the first quarter. In fact, this Saturday, we will raise prices nationwide for the 5th time this calendar year.
As for demand, the company had this to say about how it sees future sales:
So as we look to fiscal year 2021, we believe we are well positioned for growth. With our highest year end backlog in 15 years and continued strong demand, we expect to deliver the most homes in our history in fiscal year ’21.
Sounds like a lot of wood is going to be needed. To my surprise, I did not read any analyst asking about material supply concerns in the call transcript.
Lumber Shortages Heating Up
According to the U.S. Chamber of Commerce, 71% of commercial construction contractors face at least one material shortage. A recent article from a construction trade website, www.forconstrutionpros.com, provides good insight into the state of supply concerns for construction contractors.
Worth noting, it writes:
This quarter, 41% of contractors say less availability of building products and materials is a severe consequence of the pandemic, up from just 15% saying the same in Q3.
The most reported material shortage is wood/lumber, which has seen higher demand from a boom in residential construction during the pandemic. Now, 31% of commercial construction contractors report a shortage of lumber, up 20 points from 11% last quarter.
It’s one thing for there to be higher prices for a material, but quite another when you can’t even acquire it.
If you can’t acquire your material, you can’t practice your trade. In the case of homebuilders, they can’t build the house.
Per another industry article from earlier this month, it was noted:
The Timber Trade Federation (TTF) is advising all timber users and buyers to talk to their suppliers to shore up their purchasing strategies
TTF says that tight timber supply conditions will continue “certainly into Q2 2021, if not longer”.
The National Association of Home Builders is warning that the price increases and shortages could impact the economic recovery and have reached out to Government officials asking for help. Anything from reducing tariffs on Canadian wood to simply having the White House call on domestic lumber producers to ramp up production.
Lumber is simply a direct input cost to anything that requires wood. It’s particularly softwood like pine, which is what studs and plywood for housing are made up of, that is seeing the surge in price.
That higher input cost will likely be passed on to the overall cost of the finished product to ensure a profit can still be made.
Toll Brothers has noted having raised prices 5 times already this year.
For living standards and overall economic growth, this is a hindrance. More so, it makes a new home less affordable to home buyers.
The shortages and the price increases are a double whammy of a hindrance to economic growth.
It’s good to see the housing industry as strong as it is as well as the Do-It-Yourself projects being done. This has certainly given reason to be bullish on home improvement centers as well as homebuilders.
However, see that this bright spot in the economy now has a factor, shortage of wood, that will contribute to hitting profit margins or has the potential to miss out on lost revenue.
I can assure you that many decks that were wanted to be built last spring and summer did not get built due to a lack of decking material.
The economy won’t be able to bounce back as fast as it would otherwise be able to, due to supply constraints caused by the lockdown and other measures to prevent people from getting sick that have impacted supply.
The recent run-up in softwood lumber prices is quite telling of the state of the market, suggesting both strong demand and lack of available supply.
Consider this factor in your investments in home improvement centers or home builders.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.