‘The supply channels cannot handle the demand’: Why contractors are experiencing supply shortages

Instead, the opposite happened. People had nothing better to do, I think, than stay at home and decide they want to buy a new house or remodel. So, demand has exceeded supply, and when that happens, prices rise.

The price of plywood last year in April was about $7 a sheet. It’s over $50 a sheet right now. There’s only so many plywood manufacturers, and they just can’t turn factories on and off. Once they shut them down, it takes a long time to get them back running again. And to produce a new factory for lumber is a two-year process. You can’t build a mill in six months and start producing lumber.

A lot of things are coming from overseas, so you can see pictures on the Internet of all these ships waiting in line in California to offload the materials that they have and get them shipped around the country with trucks and trains. The supply channels cannot handle the demand.

You mentioned lumber being a big issue. Are you having trouble sourcing other materials as well?

Yes. There’s also a shortage of copper, so my electrical price just for the material went up 25%. There’s a shortage of polymers for paint, so paint is going up. In the recent freeze event in Texas, some of the petrochemical plants had their water pipes freeze, and they didn’t come back online until later. Some of them are still being worked on, so there’s a shortage of all the plastics and materials out of that.

It’s all over the board. Dishwashers are like gold. We got three last week and we were super happy, but we had to decide which three homes got dishwashers. They’ve been on order for three months. Dishwashers across the country are in super short supply. Again, a lot of people were at home and decided to remodel, and a dishwasher is one of the easier appliances to change out.

I’ve been doing this since the '80s, and the big difference this time is the things going up in price aren’t going up 5% or even 10%—they’re going up 25%-30%. Lumber is two and a half times what it cost last year.

It’s one contract or supplier after another. There’s also a sheet metal shortage, so garage door prices have almost doubled. Lumber is the big-ticket item, but windows used to take about a week and a half to get, and now they’re at nine to 10 weeks.

When did you first start to notice a change in the market with those costs going up?

We saw the lumber last summer. The other items didn’t really start occurring until December and January. The economy was getting back rolling again in most states, and that’s when I started noticing stuff was being delayed, stuff wasn’t arriving.

What challenges does this present to a homebuilder?

First of all, the construction time is going to increase on your house. A lot of builders now are less likely to want to sell early on in the process; they want to see what their costs are. The challenge is you can write your contract and have an escalation clause, but nobody likes that. Nobody wants to buy a home with an escalation clause saying, "If the price of lumber gets to a certain point, you’re going to have to pay more for your house."

What I think you’re seeing is a lot of builders are saying, "We’re not even going to sell the houses early. We’re at least going to get the house framed and some other things in the home." A lot of the expensive stuff is done first; framing, windows, roofing materials all goes into the house pretty quickly. And then they’ll list their houses and decide what they can get for them.

Builders normally work on a margin like a lot of businesses, so you would think they’re making a lot more money this year. Well, they probably aren’t because the costs are rising faster than they can raise prices. The buying public is not going to accept a 25% increase in the cost of homes, and as the price of homes get more expensive, fewer people can buy them.

So, that’s the challenge—how much of the cost can you pass on, and how long will the buyers keep paying the higher cost for that. I’m not sure waiting is going to do any good, but that’s what some people are probably doing, trying to wait this out. Interest rates are super low right now, which makes buying a house less expensive. If the costs go down and interest rates go up next year, sometimes they’re equal to each other.

Is there any indication of how long this will continue before prices start leveling off and ultimately coming back down?

Last year, I thought the lumber issue was going to go away by the end of the year because typically construction slows down across the U.S. in the wintertime. It did drop some, but [prices] skyrocketed even more after that. I’m going to probably tell you this is going to be the whole year.

Until they get supply channels worked out where they have materials going across the country in rail, trucks, ship—however they get here—and get employees to work to do that, the issues are going to continue. If the price gets too high, some [builders] are going to say, "I’m not going to start anymore houses [because] I can’t make the money I need to make."

There’s already some sign, based on futures markets, that lumber is going to be down [in cost] by the end of the year, but I don’t think we’ll ever get back to where it was before. I think it’s like oil—the guys who make lumber are probably going to limit supply to keep the prices up because the cost of producing that material has not gone up.