Nation's housing starts produce record plywood costs

Volatile market leaves builders reeling, consumers paying

by Eric Olson

SBJ Reporter

eolson@sbj.net

Consumers in Springfield's new housing market may be asked to dig a little deeper to buy their desired homes. Record high prices for structural panels are pushing new home costs higher, leaving consumers to foot the bill in most cases.

Nationally, home builders are paying double for structural panels such as plywood and oriented strand board, compared to one year ago, largely due to a 25-year high in housing starts last year, industry analysts say. The housing market is lumber's No. 1 price driver, said Shawn Church, editor of Random Lengths, a Eugene, Ore. firm that tracks national lumber prices.

Last October, the weighted average composite wholesale price for 11 types of structural panels soared to an all-time high of $555 for 1,000 square feet, or $17.76 per sheet, according to Random Lengths statistics. By comparison, the 2003 average for structural panels was $311 per 1,000 board feet, or $9.95 per sheet.

The shakedown locally was even more dramatic, throwing builders into "panic level" last fall, said Matt Morrow, of the Home Builders Association of Greater Springfield.

The cost for Springfield Mill & Lumber to purchase OSB tripled last fall from $5 per sheet to $15 a sheet, the highest General Manager Leon Nutt has seen in his more than 40 years in the business. Today sheets cost him $14, he said.

"This thing stinks," Nutt said. "If (lumber mills) were making money at $5, they are hitting home runs at $15."

Taking a hit

Home builders have adjusted on the fly, and consumers are generally footing the bill.

Builder Trent Cowherd of Cowherd Construction Co. said the price surge forced him to raise the costs of 10 new homes under construction this fall by about $2,000 each.

"We've upped the price accordingly," he said of the 10 approximately $100,000 homes.

However, Cowherd was not able to adjust the prices of about four homes that were bid just before the price spikes; he lost $8,000 on them.

"It had a pretty big bearing because we didn't have provisions for that kind of increase," Cowherd said. "It happened so suddenly we had no way to recoup the money on it."

Contractor Tim Lacey opted for alternative materials to compensate for the rising prices. Instead of buying OSB, Lacey used insulation board for exterior walls and 1-inch by 12-inch pine for roofing material "just to keep those homes in the price range that we needed. It was the most cost-effective way to go," he said.

But it was still more expensive than traditional OSB prices and Lacey Brothers' $100,000 spec homes have increased in price by $800 and $1,000.

Morrow said some local lumber yards might cushion the price peaks for builders they are familiar with, and suggests consumers can benefit from working with a reputable, active builder.

"When the lumber prices spike like they have, lumber companies that know they have a good, long-established customer do their best to try and cushion some of that for them.

"That may mean that the lumber company has to take a short-term loss just to maintain that relationship," he said. "That ends up benefiting the consumer who is working with that builder."

Price drivers

According to the U.S. Commerce Department, 1,848,000 new residential units were constructed in 2003, the most in 25 years.

The record pace has left lumber materials in high demand and short supply, Church said.

"The overriding factor is demand. The housing market has just been really strong, right through the recent economic downturn and as we move into the recovery phase," he said. "A strong pace in 2003 has carried right over into 2004."

While demand has the greatest impact on price, other factors are mill shutdowns and weather emergencies, such as hurricanes.

National Association of Home Builders economist Michael Carliner said Hurricane Isabel and log shortages from last summer's fires in the West and rain in the Southeast created low inventories and the rapid escalation of wood panel prices not seen before.

"Temporary price spikes are not unusual for wood products, but this is the biggest increase we have ever seen for panels," Carliner said in a news release.

Despite the combination of factors, local builders and suppliers question the latest shortage.

"I don't know whether it's a real shortage or it's not a real shortage," Nutt said. "We have (mill) shutdowns every year how can that create a shortage now?

"Hurricanes are not the reason for this," he added. "They take a spike for 30 days and then go right back to where the market was. History will show you that."

Lacey has come to expect the industry shortages and price spikes.

"They'll always have an excuse for shortages and kind of squeeze it to us," he said. "It goes in cycles. I haven't seen it in OSB before."

Expectations

Builders experienced false hope in December when wood panel pricing dropped 36 percent from the record high, but it quickly climbed back this month. At press time, Random Lengths reported prices for structural panel was $484 per 1,000 square feet, or $15.49 a sheet.

"They went on a record run last year. They peaked late in the year, bottomed in December and now they are back up and climbing pretty fast again," said Church, whose firm does not forecast activity. "It has been a pretty volatile market."

The volatile OSB market leaves future pricing unknown.

Morrow said Random Lengths data may be "a little bit ahead of the curve," and thus, a predictor of what Springfield may expect.

Lacey is hopeful OSB prices will come back down. "To what level I have no idea. That's the word on the street, anyway, from the lumber yards," he said.

Others aren't so optimistic.

"I don't see any end to this," Nutt said, adding that his yard's supply should carry him through March. "I'm hoping for a dip by mid-March."