Prices paid for goods used in residential construction ex-energy rose 0.2% in July after climbing 3.0% in June (not seasonally adjusted), according to the latest Producer Price Index (PPI) report released by the Bureau of Labor Statistics. Building materials (i.e., inputs to residential construction less food and energy) prices have declined just twice since December 2019 and have increased 19.4% over the past 12 months.

The index for inputs to residential construction, including food and energy, increased more (+0.6%) and is up 22.3%, year-over year.  This increase closely mirrors the 26% increase found in a recent NAHB survey.

Building materials prices have increased 13.0% year-to-date (YTD) in stark contrast with the same period in 2020 during which prices increased 1.1%.  The average change in the building materials PPI between January and July was +1.2% from 2015 through 2019 (the most recent data available), less than one-tenth the gain thus far in 2021.

Steel Products

Steel mill products prices climbed 10.8% in July following a 6.2% increase in June.  The pace of increases has hastened each of the past two months and prices have climbed 108.6 % over the past 12 months and 87.6% in 2021 alone.

The rate of monthly steel price increases slowed to 2.4% in May 2021, snapping an eight-month stretch during which the PPI for steel mill products rose each month by more than it had the prior month.

The monthly change in the steel mill products PPI increased by more than 10% only three times (in 1947, 1948, and 2008) over the 80-year period ending in 2020.  Monthly increases have already exceeded that mark four times in 2021.

Softwood Lumber

The PPI for softwood lumber (seasonally adjusted) decreased 29.0% in July—the largest monthly decline since tracking of the series began in 1947. Prior to 2020, the largest monthly drop in the softwood lumber PPI was a -10.7% reading from April 1980. The steep decrease came on the heels of an unexpectedly mild 0.7% decline in June as the cash price of lumber began falling precipitously in mid-May.  The PPI for softwood lumber has fallen 29.5% from its peak but remains 71.9% above its January 2020 level.

Although the direction of the index value change is encouraging, the continued volatility is not.  Price volatility as measured monthly by the PPI or weekly by industry publications remains at an all-time high for a 12-month period.

Gypsum Products

Prices paid for gypsum products increased 2.5% in July and is up 15.8% year-to-date.  Over the past 12 months, the index has climbed 21.7%–the largest 12-month increase since July 2006 (NSA).

Ready-Mix Concrete

Prices paid for ready-mix concrete (RMC) were unchanged in July (seasonally adjusted) after increasing 1.1% increase in June.

On a regional basis, prices increased in the Midwest (+0.6%) and West (0.8%), declined in the South (-0.6%), and were unchanged in the Northeast.

Although recent regional price changes have tended to balance out month-to-month, price gains in the Northeast and West have far outpaced those in the Midwest and South over the past four years.  Since July 2017, prices paid for ready-mix concrete have increased by roughly 20% in the NE and W, while prices have increased less than half as much in the MW and S (+9%).

Other Building Materials

The chart below shows the 12-month and year-to-date price changes of other price indices relevant to the residential construction industry.

As Congress continues to work on an infrastructure package, the Construction Materials index is particularly salient.  This index is much more heavily weighted with products necessary and used in large amounts in the production of “traditional” infrastructure (e.g., roads, bridges, rail).

From:   Chuck Fowke, NAHB Chairman

I am pleased to report that NAHB’s tireless efforts to engage the White House to convene a home building materials supply chain summit to seek out solutions to end production bottlenecks that have resulted in soaring material prices has borne fruit.  

This afternoon, NAHB, along with a diverse group of stakeholders, participated in a virtual discussion regarding current challenges across the home building supply chain, its implications for the broader housing market, and possible solutions. Administration officials participating in the event included Commerce Secretary Gina Raimondo, HUD Secretary Marcia Fudge, Assistant to the President and Director of the National Economic Council Brian Deese, Assistant to the President and Director of the Domestic Policy Council Ambassador Susan Rice, and Chair of the Council of Economic Advisers Cecelia Rouse.  

Thanks to our ongoing efforts, the issue of rising material prices and supply shortages has been brought front and center to the Biden administration. NAHB stressed at this meeting that it is imperative that lumber mill producers boost production in order to meet rising demand.  

A Year-Long Effort  

I want to stress that this meeting was the culmination of a year-long effort where NAHB has been in the forefront in educating the public and policymakers about how rising lumber and building material prices are harming home builders, home buyers and the economic recovery.  

NAHB leaders have appeared on CBS This Morning and numerous times on Fox Business News. We have also been featured in Bloomberg, CNN Business, Fortune, CNBC and scores of local media outlets across the nation calling for action to address rising prices and supply shortages. Overall on the media front, we have earned more than $50 million in media coverage, with over 11,000 stories featured in national and local news. Effectively, we got $50 million in national publicity for free rather than having to pay for it.  

In the policy arena, we have reached out to virtually every member of Congress on this issue and held talks with top White House officials and Cabinet leaders. Thanks to the outreach of NAHB and our grassroots membership, several House and Senate leaders have openly raised the issue of soaring lumber prices and housing affordability with Secretary Raimondo and U.S. Trade Representative Katherine Tai. These efforts helped pave the way for today’s meeting. In fact, Secretary Raimondo addressed the NAHB Leadership Council on June 28 and said that “supply chain disruptions are at the top of my mind.”  

Moving Forward  

In another positive development, many of you may have seen media reports about the recent sharp drop in lumber prices. While this is good news, the lumber crisis is far from over. Most builders have not been able to take advantage of this development because producers are still selling off lumber that they purchased from mills when prices were at their peak. Moreover, sawmill output continues to lag. During today’s meeting, we underscored that if supply does not increase fast enough to meet demand, we may find ourselves in the same situation as last November, when lumber prices posted a similar steep reduction only to reverse course and move to record-high levels.  

And while lumber prices have just recently begun to move downward, the price for other building materials, such as oriented strand board, continue to soar.  

While today’s White House meeting was a step forward, we are not out of the woods yet. Looking ahead, we will remain laser-focused on not only lowering lumber prices and increasing supply, but also keeping pressure on policymakers to improve supply chains for all building materials in order to protect housing affordability. I want you to know that NAHB will continue to work relentlessly on all fronts to find solutions that will ensure a lasting and stable supply of lumber and other building materials for the home building industry at a competitive price.  

I invite you to learn more about what NAHB is doing to resolve the lumber crisis by visiting our lumber page at nahb.org.

Sales of newly built, single-family homes fell 6.6% in June to a 676,000 seasonally adjusted annual rate, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The June number follows downward revisions to the May estimate and marks the lowest rate since April 2020. Despite the recent cooling trend, new home sales are up 13.5% on a year-to-date basis.

“Sales continued to trend lower in June as some builders slow sales contracts to manage supply-chains, amidst longer delivery times and higher construction costs,” said NAHB Chairman Chuck Fowke. “While lumber prices have shown some improvement in spot markets, these declines take time to translate into lower construction costs. Moreover, other items like OSB remain elevated.”

“The June data came in lower than expected, and we anticipate an upward revision next month,” said NAHB Chief Economist Robert Dietz. “Nonetheless, sales have trended lower as construction costs have increased and builders have sought to manage material delays and cost challenges in the construction pipeline, in addition to dealing with shortages of lots and labor in many housing markets.”

A new home sale occurs when a sales contract is signed or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the June reading of 676,000 units is the number of homes that would sell if this pace continued for the next 12 months.

Inventory ticked up slightly, but remains low at a 6.3-month supply, with 353,000 new single-family homes for sale, 46.5% higher than June 2020. Inventory of homes available for sale, but not begun construction was up 84% year-over-year, a clear sign of supply-side limitations in the building market. In contrast, completed, ready-to-occupy inventory is down 44% year-over-year, to just 36,000 homes.

The median sales price was $361,800, up 6% from the $341,100 median sales price posted a year earlier.

Regionally, on a year-to-date basis, new home sales rose in all four regions, up 19.5% in the Northeast, 23.9% in the Midwest, 15.6% in the South and 4.1% in the West. These significant increases are due in part to lower sales volume during the Covid crisis a year ago.

Perhaps no manufactured good is less technologically sophisticated than a 2×4, while none is more complex than the latest microprocessors. Yet the U.S. economy is currently suffering from shortages of both lumber and chips—and for similar reasons.
In both cases, today’s shortages are the legacy of past busts, which then led to years of underinvestment that has left producers unable to respond to sudden surges in demand. Start with lumber, which is an essential material input for home building. Sawmills and other wood product manufacturers cut their production capacity by about a quarter after the housing bust. While investment has since recovered, productive capacity in March was still about 11% below the 2006 peak.

Until recently, that seemed like a sound business decision. Most lumber and other wood products are used for construction and furniture manufacturing—two industries that looked to be permanently smaller after the mortgage debt bubble popped. The number of single-family housing starts from 2017 to 2019 was about half what it was from 2003 to 2005. Despite the capacity cuts, the Federal Reserve estimates that sawmills and other wood product manufacturers were operating at about 78% of capacity in the years immediately preceding the pandemic, compared with 79% during the peak of the housing bubble.

The problem—for both home builders and home buyers—is that the construction industry’s lost decade- plus ended so suddenly. Since July, Americans have bought about 79,000 new single-family homes each month, up roughly 50% from the recent pre-pandemic average—and the pace of purchases seems to be accelerating.

Even during the best of circumstances, builders would have struggled to meet that surge in demand, because construction takes time. That’s why the number of completed new homes available for sale has plunged to its lowest level ever. Builders have only been able to prevent overall inventory from collapsing by selling homes where construction hasn’t yet started.

The current situation is being exacerbated by the atrophied lumber supply chain. Just as it takes time to build a house, it takes time for sawmills to boost their capacity. Until then, markets ration scarce quantities through higher prices. The producer-price index—businesses’ version of the consumer-price index—shows that the cost of goods sold by sawmills are up more than 70% since the pandemic began, while the price index for all materials used in construction is up more than 13%.

Despite the strength in demand, soaring costs are causing home builders to begin cutting back on construction starts for new single-family homes.

The situation with chips may seem different, but it’s actually the same. The first key piece of context is the boom-bust cycle that hit America’s semiconductor industry in the 1990s and 2000s. Sales of American-made semiconductors and related devices fell from $94 billion at the peak in 2000 to less than $66 billion the following year. As of 2019, sales were worth less than $65 billion. Similarly, revenues from printed circuit assembly fell from a peak of $37 billion in 2000 to $24 billion by 2002, and were also $24 billion in 2019.

Unsurprisingly, businesses responded to the lack of sales by keeping a tight lid on their investment in property, plant, and equipment. After hitting at a little more than $33 billion in 2000, capital spending on physical manufacturing capacity by the total computer and electronics manufacturing sector was just $25 billion 2019.

Producers in the rest of the world made up the difference as demand from the U.S. and elsewhere continued to rise over the past two decades. But like American sawmills, those foreign producers were similarly unprepared to handle the surge in demand for chips during the pandemic.
Being stuck at home and flush with cash from economic impact payments and enhanced unemployment benefits led to a huge spike in spending on consumer goods that require microprocessors, including phones, TVs, laptops, tablets, exercise equipment, and cars and trucks.

At the same time, businesses felt compelled to spend more on computers, phones, and specialist medical devices either to support their remote workforces or to respond to the pandemic itself.

The combined effect has been similar to the impact of the demand for new homes on the lumber market. But instead of home builders cutting back on construction starts, we have auto makers restraining their production in a hot market even as they get stuck with inventories of parts for unfinished vehicles.

Ultimately, both the lumber shortage and the chip shortage will be resolved with some combination of lower demand and higher supply. The question is how long will it take. Investment takes time, and businesses reasonably want to be confident they won’t get burned with an overhang of excess capacity if the current demand spikes prove short-lived.

This means that the fastest way to fix the current shortages and bring prices back to normal—at least, the fastest way that doesn’t involve tanking the economy—is to keep the boom going. And that seems like the plan of both the Federal Reserve and elected officials.
Write to Matthew C. Klein at matthew.klein@barrons.com

This webinar has been postponed

The Oklahoma Home Builders Association has selected Jim Schuff, co-owner of Vesta Homes, as 2021 president.

Other officers are Brandon Jackson, of Tara Custom Homes in Tulsa, vice president-treasurer; and Ron Nance, of The Oaks in Lawton, vice president-secretary. Steve Taylor, of CenterPoint Energy, is chairman of the Associates Council.

Four people have been added to the Oklahoma Housing Hall of Fame.

Irvin “Bud” Blakley, as both a past president of the Oklahoma Home Builders Association and the Oklahoma Lumbermen’s Association, was a leader in housing for rural Oklahoma. Through his building company and lumber company in Chandler, he was involved in thousands of homes.

He was active in civics both in Davenport and Chandler. He also was active with the state associations, and the National Association of Home Builders. He was Oklahoma Builder of the Year in 1984 and was one of the state’s first Certified Professional Builders.

Leo Cravens served as the Oklahoma Home Builders Association’s executive officer from 1973 to 2004. He was also principal lobbyist for the association. He was also a past president of the Oklahoma Society of Association Executives and held the Certified Association Executive designation.

He helped shape the housing industry in regard to licensing, workers compensation reform and the association’s support of state "right-to-work" policies.

Ben Newcomer was a homebuilder and developer in the Norman area for more than 40 years. He was in the local and state associations and served was president of the state association in 1983. He most influential as a mentor to many, helping young builders and developers learn the intricacy of their profession. He also was an avid golfer and used lessons learned on the course in many of his business dealings.

Tom Wenrick is a developer, Realtor, and appraiser with 50-plus years of real estate experience, recognized as one of Tulsa’s foremost developers of residential subdivisions and commercial properties.

"It is Tom’s successful legislative advocacy where a developer’s lot inventory to be taxed at cost rather than retail until sold to a third party that distinguishes him among his peers and that has saved builders thousands, if not hundreds of thousands, of dollars over the years," the state association said, noting that Wenrick is a past president of the Tulsa and state associations and both have honored him with Builder of the Year awards.