By Andrew Khouri, Carly Olson, Andrew Mendez
From Los Angeles Times
At times, bills are coming in thousands or even hundreds of thousands of dollars over estimate. In the most extreme cases, projects have come to a screeching halt as prices spiral out of control.
Ken Kahan, president of developer California Landmark Group, said he paused work on a 50-plus unit apartment project in the Los Angeles area after a lumber bid came in triple the original projection. “When you look at commodities do that—either the world is turning upside down or there is just a gyration that just needs to settle down.”
Kahan hopes to restart the project in coming months if lumber prices stabilize, but analysts said pricing is likely to remain elevated for a prolonged period because of the COVID-19 pandemic. When the coronavirus started to spread in the United States last year, lumber suppliers assumed demand would plunge, and they stalled production accordingly. Distributors followed this lead, stopped buying lumber and sold off inventories.
But the companies predicted wrong. Many Americans, stuck spending more time at home, decided they wanted a change and sought to remodel. Others sought out a newly built home, including well-off renters who wanted more space and a yard. Those kinds of construction require a lot of lumber.
Suppliers and distributors can’t immediately reverse the effects of their decision because there aren’t enough skilled workers or active mills to process the wood. “It was just this mad catch-up to ramp everything back up, but it just doesn’t work that way,” said Greg Kuta, chief executive of Westline Capital Strategies, which specializes in lumber trading.
In early May, lumber futures peaked, up more than 300 percent from a year earlier. Prices have since come down somewhat, but they’re still up more than 200 percent compared with this time last year.
The inflated prices may last a while. “I don’t think that you’re going to see this level out for probably 12 to 18 months,” said Tony Uphoff, CEO of Thomas, a sourcing platform that connects companies with industrial suppliers.
Part of the problem is that the United States.S. relies on lumber from Canadian forests—a supply that has shrunk in recent years, Uphoff said. In 2017, the Trump administration imposed a 24 percent tax on softwood lumber imported from Canada, and in response, several Canadian mills shut down. “That actually was the initial step that created some of the problems we’re still seeing in the supply chain today,” Uphoff said.
Despite the constraints, construction of new homes is still on the rise this year, reflective of a hot housing market developers say they are rushing to meet.
But some builders are starting to slow down. If that choice becomes widespread, it could exacerbate a supply shortage that’s been driving up housing costs for years. Some are pressing pause on existing projects, while others say it’s harder to find new deals that still work financially given the rise in lumber prices.
For some companies, the big issue isn’t even price, but rather whether they can find supplies, whether it’s wood or other staples made scarcer by pandemic-ravaged supply chains.
Shay BenZvi, a contractor and owner of Green Remodeling Solutions in Canoga Park, said he sometimes walks into the store only to find two-by-fours that are warped and ruined.
“A lot of the companies took out their bad stock … and they put it out there on the shelves so people will have lumber,” he said. “But this is not something that can work.”
At the Black Cat restaurant in Silver Lake, manager Benjamin Schwartz struggled to track down affordable picnic tables for the eatery’s outdoor dining section. When he called home improvement stores such as Lowe’s and looked online, he often found the wooden tables at double or triple the price he’d expected.
Finally, he found something in the normal range.
“We have some picnic benches that we bought for $100 each that were really hard to come by,” Schwartz said.
Among those pausing projects are affordable-housing developers who have to cobble together financing from myriad sources that enable them to subsidize rents.
“We are getting to a point where we have to slow down our pipeline,” said Jesús Hernández, director of housing development at Community Corp. of Santa Monica, a nonprofit builder. Continuing at the former pace, he said, would cut too deeply into the group’s funds and prevent it from putting together projects.
Rapidly rising home prices, on the other hand, give developers of single-family homes more of a chance to keep building, and some developers said they’ve been able to pass along price increases.
According to the National Assn. of Home Builders, rising lumber costs are adding nearly $36,000 to the cost of an average newly built house and some developers are getting creative at passing that along.
When buying a newly built home, buyers before the pandemic typically signed up for a waiting list and then paid a set price for a builder to construct the house on a vacant lot in a new-home community. But an April survey from the trade group found a majority of builders now have “escalation” contracts that allow them—if construction costs rise—to increase the sales price after a buyer makes a down payment.
Doug Bauer, chief executive of national home builder Tri Pointe Homes, said that despite the price increases, he isn’t seeing buyer fatigue and noted that his company could sell homes faster.
Rather than escalation clauses, he said Tri Pointe has decided to slow the number of lots it releases to homeowners for sale. He said that enables Tri Pointe to price the homes at a point that better covers surging lumber costs. It’s a go-slow strategy more and more builders report employing.
Contractor Chris Williams said he’s consistently raised the price he charges to build backyard homes known as ADUs, an increasingly popular investment for homeowners after the state loosened development restrictions in recent years in a bid to ease the housing shortage. So far Williams said people are paying, but lumber prices sometimes move fast and don’t enable him to cover his costs.
“Once I sign that contract for that amount of money, say $300,000 or whatever it is, I have to stick to that,” he said. “I just got to take a hit and then on the next project put my prices up to adjust.”
Mike Moore, co-owner of Snap ADU in Oceanside, said he’s had to raise prices by about 30 percent on the ADUs his company builds, with a common 500-square-foot one-bedroom model rising from $125,000 to about $170,000.
In addition to the lumber issue, he said the costs of metal, windows and appliances are on the rise as well: “Almost on a weekly basis our supply houses and vendors are emailing us saying, ‘I’m so sorry, more price increases are coming.’”
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