September23

Market Madness: The 2020 Spike

By Tony Shepley

We are in the midst of very uncomfortable times for everyone in the construction industry. From 5 months ago when we were worried about being shut down, to now when materials prices are at record highs and availability is at record lows.

The lumber market is measured in level by an index, which is a composite average of a number of common items. It is called the Random Lengths Composite Index. In the same way that the Dow Jones Industrial Average gives you a snapshot of the value of stocks and the relative optimism we feel for our economy, the Random Lengths Composite Index is a measure of where pricing and sentiment sit. In both cases, rapid increases are always followed by a correction. The big question is always when the correction will come. In any overheated market, there comes a point when people just don’t feel comfortable buying high. And when people stop buying, the value slide starts.

You can see this happening right now in real estate, with properties selling for crazy prices driven by multiple bidders. 

In April, the Random Length Composite Average printed at $369. As of a few days ago, it printed at $968. That is a peak (a 270% increase since March’s lows) that the market has never seen. This is a panic driven price spike brought on by the frenzy of the marketplace and the swing from everyone thinking the world was going to shut down in March. to the other extreme; the irrational buying spree that has recently been going on with home improvement, boats, cars, real estate, and yes building materials.

Suppliers have been caught short by the spike in prices and the shortages in supply. And you now see lumber yards giving quotes that are good for 7, 10, or 14 days only. We at Shepley never give a quote for less than 30 days. We work off our average costs. Buying ahead has helped us stay much lower than the market. We absorb as much increase as we possibly can, but average costs do go up over time and we are forced to adjust. We do everything in our power to clip the peaks off the market spikes to save our customers from as much of the market impact as we possibly can.

Builders are no different. You share some of the pain, but can’t take on all of the pain of a rising market and you ultimately have to pass it along to the consumer. With any market there are always choices, buy now or buy later, pay more today, or wait it out for a lull in the action.

When you see a speeding train bearing down on you, don’t waste time trying to flag it down, just step out of its way. There will be another train behind it. Right now the lumber market is a runaway train, and because of the demand for new homes, we are all still trying to jump on regardless of the risk.  But it is worth reminding ourselves that we have the option to simply step out of the way and catch the next train, if we choose. Building now or waiting both carry their own risks, but we cannot delay having candid conversations with our customer to ensure the risk is measured and shared.

We have seen many market swings and this is the most extreme in our 42 years of experience. It too will pass, and our best guess as to when is soon. We know that traders are nervous, and they should be. Mills and traders are milking this market for all they can, but they know that what goes up always comes down. This will too. It will peak and start to come off as soon as fear pushes confidence aside. Our prediction is that within the next three weeks it will start to happen. In the meantime, we will all be paying more, as we have been. But we are doing everything we can to help protect you from the full impact. This is painful for everyone but clearly a time to work together.

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