Building material costs - A bubble soon to pop?

After the initial Covid shutdown in the Spring of 2020, uncertainty carried the day. For the building materials industry, the shutdown was very short-lived and not only reversed quickly, but demand sent prices of some materials to record levels that to continue today. Are increased material costs here to stay? Most likely not, and the bubble may pop sooner versus later.

By April of 2020, Covid was everywhere, and need-based panic buying was the norm (remember the run on toilet paper!). The building materials industry’s initial pause soon gave way to a surge in DIY, staycation upgrades, and remodeling. You do not have to look any further than Home Depot for evidence of this situation. Pre-pandemic (1Q20) versus most recent quarter (1Q21), Home Depot reported a 32.7% increase in sales. Year Over Year, 2020 sales grew 20% compared to 2019 (with a several-month shutdown baked in for 2020). It is interesting to note that Home Depot is not providing any guidance on revenues for 2021. Are they concerned about a drop-off? Nonetheless, not only is lumber still at high prices (still trading at 2-3 times its average price over the last 20 years, not to mention even higher prices as recently as 3 months ago), but high costs have reached other common building materials like copper, steel, concrete, and even bricks.

Mutual Materials is a large masonry company based in Bellevue, Washington that manufactures a variety of brick, pavers, and other masonry products for residential and non-residential construction. What makes Mutual Materials different is that they are privately owned and manufacture their products in the US, versus many other building materials firms, which get products from overseas (over 30% of the building products sold in the US are produced in China). Trevor Fearn, their Commercial Sales Manager for several states including Oregon, told me in an interview that they had record sales for 2020, despite manufacturing slowdowns due to Covid and a tight labor market. Almost halfway through 2021, he said sales are ahead of 2020 levels and are projected to continue through the rest of this year into 2022. Trevor said that Mutual Materials has done their best to keep price increases to a minimum, but production costs have forced them to implement higher than normal increases. Interestingly, when asked about whether the sales increases were due to an increase in pricing, in volume sold, or a combination, he said primarily due to pricing. This situation would suggest that much of the increase in revenue is coming from price increases on products and an inability to meet demand, versus higher sales volume. So, if prices fall (due to less demand or other factors) will an increase in sales volume offset to keep building materials sales at elevated levels?

What gets lost in the headlines is that this spike in prices is largely driven by the residential side of the market. The non-residential side has regressed due to Covid, by contrast. Driven by home improvement type customers and home builders, again Home Depot’s financials tell the story. On the flip side, according to the AIA, private/non-residential new building construction (other than industrial) was down by nearly 6% in 2020 (YOY) and will not start to recover until 2022. Some recent recovery in medical and infrastructure work is likely to further increase in 2021/22. 2023 will be the most interesting. Will residential slow down significantly and be offset by commercial and other non-residential to keep building materials prices at elevated levels? Or will a slowdown in residential drive material costs down? How these trends unfold will likely have a direct effect on much of the pricing for building materials.

This post-2022 uncertainty is further supported by Trevor Fearn. Mutual Materials is not anticipating sales growth in 2023 to be similar to the prior 2 years. In speaking with some of our other building materials clients, they share similar views. 2023 is only 18 months away at this point, but lots of things can still happen (Covid reopening, government stimulus, excessive inflation, new taxes, etc). My feeling is that the pricing bubble for building materials does not have much air left, even with a recovery of non-residential construction. We will see.