The coronavirus pandemic interrupted a number of key supply chains that impacted the construction industry in a very meaningful and unfortunate way. Last year, there was a massive shortage of lumber that continued well into 2021. As a result, lumber prices soared earlier this year, rising over 300% at their peak.
But now, that trend has reversed. Not only have lumber price gains been wiped out, but at this point, lumber prices have returned to 2018 levels.
Now you'd think that would be good news for real estate investors looking to scoop up new construction properties or engage in extensive property renovations. But actually, a decline in lumber costs may not end up making much of a difference in the near term.
Builders may not share the savings
The past year has been a tough one for builders. Not only have they grappled with rising costs, but they've also dealt with materials shortages beyond lumber that have impeded many projects and caused countless delays.
Construction delays can be bad for investors, throwing off plans. But they can also be costly to builders. And so while the price of lumber has finally come down, builders may not be so eager to share the savings with new homebuyers. Instead, they may seek to charge the premiums they've been charging all year in an effort to recover from the events of the past 12 to 18 months.
This past spring, it was estimated that buyers of newly built homes could expect to pay about $36,000 more per property, on average, than they would've paid in the past. That increase was largely due to soaring lumber costs.
At this point, builders don't have to impose the same prices since they can procure lumber for less money. But that doesn't mean they won't try. And given the glaring lack of inventory in the residential real estate market, investors looking for homes to be used as income properties may have no choice but to pay those premiums to get a piece of the action.
The same applies to investors in the house-flipping business. Lumber may be cheaper, but other building materials might be holding steady at higher prices. And investors who are outsourcing renovations may find that builders are just plain charging more for labor.
Now the good news is that this problem may be somewhat temporary. As supply chains catch up to demand, the cost of construction materials across the board could go the way of lumber and start to sink. Similarly, if more homes hit the housing market, new-construction builders may not manage to get away with charging such high premiums.
But we may be several months away from reaching that point. Real estate investors looking to buy homes in the near term should gear up to negotiate for new builds and house flips alike. Builders may attempt to charge sky-high prices, but that doesn't mean they won't be open to counteroffers, especially if they need the revenue to keep their businesses alive.