Thursday, September 28, 2017

Was Modular Housing Industry Caught with Its Pants Down?

Our industry knew that costs of raw building materials were going to increase this year. Many factories bought lumber in anticipation of the uptick in pricing when Trump was elected and promised tariffs on Canadian lumber.


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Preliminary anti-dumping duties of as much as 7.7 percent will be levied on Canadian producers, the U.S. Department of Commerce said in a statement released just a few months ago. That move follows the government’s decision in April to slap countervailing tariffs of up to 24.1 percent on shipments from Canadian companies.


Letters were recently sent out from the modular home manufacturers to builders who were for the most part aware that price increases were headed their way. Houses they ordered and were in the factories’ production pipeline were safe from increased pricing. This is not unusual in our industry.


But then the unimaginable happened. Two, not one but two of the most powerful Hurricanes in US history hit our shores within weeks of each other. Harvey destroyed a major part of the Gulf region of Texas including Houston. The damage was horrific.


Then Irma hit Puerto Rico and virtually wiped out everything that hadn’t been damaged by Harvey earlier.


In Texas the refineries were hit hard but production of gasoline and diesel fuel was brought back quickly. However the production of resin used for all things plastic like plumbing products for housing hasn’t seen this quick return to production. My son works for one of the largest resin producers in the world and told me entire factories that made pipe from their resin closed production and don’t expect to be back to work for months.


I just learned that mills that produce plywood and OSB for housing are so far behind trying to meet the demand for new homes in TX, FL and Puerto Rico and other countries hit by Harvey and Irma that they are not quoting prices until their materials are actually loaded onto trucks and railcars for delivery. Spot pricing.


Modular factories have to raise prices almost weekly hoping that they will be able to stay ahead of further price increases on all building materials. Letters to builders and developers are being sent out continually announcing new pricing with short dates to react to them.


And all this happened while our industry is enjoying a very good building year.


One year when I worked as the manager for a large lumber yard we were selling 2x4’s for 99 cents each and making a whopping 3 cent profit. That year saw four price increases within the prime selling season. We paid 96 cents and sold for 99. The next week we paid 98 cents and had to raise our prices to $1.03. The following shipment cost us $1.07 for each stick and this repeated itself a couple more times. In the end our company had to borrow money to offset the rapidly rising costs.


Factories in the East that build mostly custom modular homes where it takes longer to process quotes and build homes were already on 60 to 90 day backlogs in production. Quotes that were good just 2 weeks ago are now useless and being requoted.


Yes, there is plenty of lumber and other building materials to build all the houses the modular housing industry needs to produce this year but at what cost?


While the factories find themselves having to raise prices, some as much as 20% builders are even in a worse position.


Every builder has prospective buyers’ homes being quoted by their factory, stamped house plans completed and contracts signed with buyers. These are the people caught with their pants down.


How does a builder gave an estimated price for a house today? How do they tell the buyer that signed a contract to build a house but is waiting for mortgage approval that their home price is no longer valid?


Some builders are being told the deposit has to be into the factory in days to insure not getting hit with even higher pricing. And if Texas has learned anything from watching the fiasco of rebuilding NJ and begins to rebuild quickly, even more lumber, ply and OSB along with resin based products will continue to climb in price.


And let’s not forget the Caribbean. They need as much if not more than mainland US needs.


During normal times a builder can have house plans at the factory being quoted, then drawn and redrawn, requoted which could take up to a month. Then they have to go over everything with their customer, wait for final approvals from their state’s building code department, then put a package together for the lender and local building code officials, pray that everything comes together and they can build their customer’s new modular home.


Now try to compress that from months to less than a week just so they don’t get hit with a new price increase. Not something for the faint of heart.


Site builders are being hit with the same increases but they have a small advantage as they buy material as they need it and have the luxury of shopping around for the best pricing.


There was nothing to prepare us for Harvey and Irma and blaming all your problems on that is an exercise in futility. It is happening and we have to deal with it.


The 3 best words of advice for the modular housing industry today -


“WALK IT OFF”

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3 comments:

Carl Nolan said...

It's tough walking this off Coach. When you call your customer one day to tell him the price has gone up from the factory and the next day you call him to say that his house has been moved back a month and the next day you have to call and tell him he needs to get his deposit in today so you can hold the price for his home that just got moved back a month, then and only then are you the tough SOB that can "Walk It Off"
I've been through price increases in the past but this one is bad. And yes, my pants are already around my ankles.

Modmentor said...

Gary,

Your latest article says nothing about the other problem in the lumber/flat goods pricing. There are several large fires in the west that have all but shut down limbering, to mill transport and the mills. Yes, very little has been said in the news, but this is exerting more pressure on the pricing we are seeing than anything we could possibly realize from the hurricanes and the Tariff. The lumber industry started raising their pricing in January in anticipation of the CVD being levied, so we all had a chance to adjust to eh new pricing brought about by that. What no one saw coming was the impact of these wild fires on the prices. Yes, admittedly, the devastation in Texas and Florida brought about some price creep, but that will subside as it always does, but until these fires are out there is no stopping the climb in procing ,

Coach said...

And the housing industry won't climb back anytime soon from all the fires that have devastated the West. The media only covers a story until it finds something new to cover leaving us feeling the first problem has been solved.

I just heard from a factory owner on the West Coast that told me his FOB price has gone up 76% over the past 4 years.