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Is Now a Good Time to Build? Vendor Pricing, Costs & What Moves the Needle (EP39)

Trust the Process Podcast | Season 2, Episode 39 | 25 min | with Krista & Michael

Episode Summary

Is now a good time to build? Krista and Michael go behind the numbers on vendor pricing, construction costs, and the real factors that drive when and how builders make pricing decisions. From trade availability to market timing, it's an inside look at what actually moves the needle in today's building environment.

What We Cover

  • Whether now is a smart time to build

  • How vendor and trade pricing really works

  • What drives construction costs up or down

  • Trade availability and market timing

  • The factors that genuinely move pricing decisions

Listen to This Episode

Full Transcript

Krista: Welcome back to Trust the Process podcast where we talk about new home construction, real estate, the housing market and everything in between. I'm Krista, here with Michael, and we've been talking a lot lately about vendors and vendor pricing. We thought we'd turn on the cameras and let you join the conversation. There's a lot of good information here, and I know Michael's pulled some data to share. Great topic, and a chance to share a little insight with you. Thanks for joining us today. Hi Michael.

Michael: Hello, how you doing? This is on the heels of a conversation we had with a potential build-to-suit client building a very luxurious home in South Shore Country Club. But it's a conversation I've had with almost every build-to-suit client ever: is it a good time to build? What are prices like? Do you think prices are going to come down, or that we'll be midway through construction and prices shoot up? I think some of that is our battle wounds from the COVID era. They may have heard horror stories of friends in the middle of remodels or construction projects where the price of lumber shot up 300% in a two-week period. We were building homes during that time, and I bought many overpriced lumber packages. That stings.

Krista: You had to. If you wanted lumber, you had to overpay.

Michael: Right. Your slabs were poured and you just had to pay. Everyone was doing it, and you couldn't readjust until several months later. If you're a production builder, you say, whoa, let's pull back on the next few phases or raise our prices, because we published all these prices based on certain build costs, and now the costs are 20 to 30% higher in a two-month period. I was never a big builder pre-COVID. We built a lot of spec homes, but we never did any build-to-suit contracts.

Krista: Yeah.

Michael: So I don't know if those questions came up in the early 2010s or the early aughts, but as I started to build a division of the company, it has definitely always been a question. And I never quite know how to answer it, because if I had all the answers, I'd adjust my business model accordingly. So I just go off the info that I have and the predictions my magic eight ball tells me.

Michael: I give them those insights and say, look, I'm still pulling permits, still building neighborhoods, still moving full steam ahead. I'm cautious about this because of X, Y, and Z. This person asked yesterday, so it's late January 2026. My answer was that 2025 was very favorable for builders in terms of price indices. Commodities were generally soft, so from a top-down perspective a lot of raw goods were just cheaper. Demand was down in the residential sector, and even in the commercial and office sectors. We had a contraction in the construction industry that was really only bolstered by data centers and maybe distribution centers. So we didn't see pullbacks in drywall and concrete, because those are fungible items used in a lot of applications. But we did see a pullback in lumber prices, because lumber is generally a residential building product. You're not seeing a lot of lumber in data centers. Versus steel, there's still some infrastructure spending, so there's upward pressure on rebar and concrete and asphalt.

Krista: Versus steel, in a more commercial application.

Michael: We had those funds from 2022 from that bill set aside that we're still spending. A lot of those were 10-year projects that trickle in over a decade. So that gave some backstop to construction prices and some raw commodities. But overall in the residential sector, everything was largely softer than the year before, and definitely softer than two and three years before, when things were artificially elevated. To give perspective: we're still at about $600 per thousand board feet for lumber as an indicator. Pre-COVID that was around $300, maybe $350, and we never got that low again. We dipped into the mid-$400s in mid-2024 and hovered around there with random spikes around tariff scares and other black swan events. So $470 sounds close to $300, but it's a 50% increase. Right now we're at $600, a 100% increase from pre-COVID.

Krista: Wow.

Michael: For context, I've paid as high as $1,700 per thousand board feet, right around the peak, because my timing is impeccable. I wanted the bragging rights to say I bought lumber at the peak.

Krista: You've said that before.

Michael: So we're still at about a third of where we were in 2021, which is good. Lumber also dictates trusses and OSB. OSB is oriented strand board, basically wood scraps glued together in sheets, a proxy for plywood. Other things have pushed OSB up. It's an extra step beyond the milling process and uses a lot of glue, so when glue and resin prices increase, OSB doesn't fall like a feather.

Krista: And for a period, those commodities weren't available. OSB is otherwise a very affordable, low-end product, but suddenly you couldn't get the resin to hold it together, so it became super expensive and hard to get. You don't realize how often you use that kind of product until it's not available.

Michael: That's right. Until you're paying through the nose for it. There was even a time when OSB was more expensive than plywood, which is a way higher quality product, because it uses so much more resin. It's since come down and the gap has closed. Plywood uses resins too, just not nearly as much.

Krista: Really?

Michael: Again, lumber is just one aspect. Everyone thinks lumber is like 20% of the house budget. It's not even 10%. On our custom builds it's about 4%, maybe 5% for the lumber package.

Krista: People are always shocked by that. We did an episode on it in the first season and got so much feedback, people saying, are you sure that can't be right? It's not as big a chunk as you imagine.

Michael: Right. Lumber and trusses together are maybe five to six percent of the total construction budget, and framing is about five to six percent, so between the two, about 10%. That shows you everything else. We spend as much on engineering, architectural, permitting, and impact fees on a custom home as we do on the lumber package.

Krista: Wow.

Michael: That gives you a good idea at current lumber prices. So you can see how convoluted it is. Lumber is probably the most volatile commodity in residential construction. Concrete is relatively stable. Trees are harvested, and it's a long way downstream before it becomes lumber, so the supply is largely fixed. The only thing that affects pricing is demand. Whereas concrete suppliers can throttle supply to match demand, so they become much more balanced markets. Concrete doesn't expire. Portland cement is pretty much ready-mixed; we make it the day we need it. Lumber can only sit in a yard ready to go for so long before it starts to rot. And harvesting is a factory process, so they harvest regardless of demand and need to make room for new trees.

Krista: I hadn't thought about the storage part of it.

Michael: There's a sweet spot with Douglas fir to harvest it.

Krista: It has to age too. It can't be too soft, but it can't be too old or brittle.

Michael: Right. So those things keep it volatile. The other things can be brought down. Stucco out west is largely what we use to clad houses, and it's a concrete product, so it's relatively stable. Windows are three degrees removed; they're not a raw good. Window manufacturers can just dial down the factory, and a lot of windows are made to order anyway. Doors and trim are really durable, so they can sit in storage. Nobody wants to hold seven houses' worth of doors, but doors only come in about four sizes, and they're made pre-hung to order. You can store hundreds of thousands of dollars of doors in one little warehouse. So finished goods are largely stable. What you really watch for is softness in the market where a vendor is more motivated to clear his stock.

Krista: Right.

Michael: So our conversation yesterday was: if you exclude the commodities, all we're talking about saving in a soft market is maybe 10% of the entire bill. That's not nothing, but it assumes we timed everything right, the window guy was ready to deal, and the windows you chose weren't made to order. The product has to match your specs and the timing has to line up. It's very unlikely you'd hit every single item, which is what it would take to save 10%.

Krista: Right.

Michael: With things like lumber and drywall, which is very stable, you're not going to time it right. It's like saying I want to take a road trip but I want to go when gas is at its 30-day low. You're either going to go when you want to go, or you'll find out afterward. You'll say, I bought it for $3.35 a gallon and the next day it was $3.25, darn it.

Krista: Right. And you're not going to head out on the trip without knowing there's a potential it'll be more expensive than you want. The same is true with building a home.

Michael: Right, you're going to plan your trip. So when you're a build-to-sell builder, which we largely are, we don't do a ton of build-to-suit, because it's a smaller market and there are more people who do bespoke custom homes exclusively. We love those clients, but it's not a huge part of our business. So largely I'm making these decisions as they pertain to build-to-sell. My point is, if Whirlpool is making a thousand refrigerators and demand is soft, they're going to have to discount them.

Michael: They're not going to sit on those refrigerators; once it's made, you've got to get it moving. So that's how homes differ. A window is three degrees removed from a raw material, but a house is probably a hundred degrees removed. It's on a unique lot, a unique design.

Krista: Right. And because we're in a more luxury market, you're not going to buy 100 fridges when the price is right, because that's not the same fridge we use in every home. We're not doing the manufactured, cookie-cutter situation where one fridge goes in every house. Stocking up and renting a warehouse, those fees would cover whatever we saved. So it's not feasible for our build style.

Michael: No, it's not feasible. Let Appliance by Design, one of our appliance vendors, deal with storing it. So when I was recounting these things with him, it was case by case. We're ready for appliances, so let me call Appliance by Design and ask what Thermador is running right now, or if there's anything special if we combine two dishwashers. Every now and then you catch a really good deal.

Krista: That's right.

Michael: But again, on a $2 million build, you saved, instead of your appliance package being $47,000 it was $46,000 or $45,000. It adds up, don't get me wrong. Our build costs today are lower because we've gotten better at building homes, better at sourcing materials, and we have more leverage with our vendors. We built in a soft build year.

Krista: It adds up, because you get a few of those in a home and your margin matches.

Michael: Our build costs are about 20% lower than they were in 2022 and 2023, and that's a function of a lot of things. We built one house in 2024 that was the same model we built in 2021, and we were into that home for about 12% less, at a nicer spec level.

Krista: It was.

Michael: So even apples to apples, we're probably about 15% better off as a company.

Krista: 2021 was also a tough year. Things were hard to get, everything was expensive, and the market was booming in a different way.

Michael: That's a bit of a bad example, it's undoubtedly a high watermark. But that said, through mean reversion we're getting closer and closer to what I'd call normal build costs, and I think we've settled into where they land. So as a builder, especially a build-to-sell builder, you have to value-engineer your homes, squeeze your vendors, and hope the market stays friendly to builders. Every home we build is largely a home we sell, so we also want it friendly to sellers. In 2025 it flipped: not so friendly to sellers, but it became friendly to builders. It was a yin and a yang, probably an equivalent pullback.

Krista: Yes.

Michael: It stands to reason, because we're in a market with a lot of production builders, so we have the infrastructure of suppliers and vendors used to catering to them. If they pull back 10%, we benefit. Production builders pulled back because demand pulled back about 10%, not necessarily prices, we still broke another record on prices and ended up higher than 2024.

Krista: Huh.

Michael: So prices didn't pull back, but demand did. And part of why prices had a backstop is that supply shrank, because builders move the market by how they pull permits. We benefited from that. So it's a hard question to answer. I think I rambled with him, and I think I rambled here.

Krista: But it made sense. The interesting part to me, and this was my realization in that conversation, is that this isn't unique to building. This client happens to be in the restaurant industry, and it's the same: this is how we supply our kitchens, these are the commodities, this is their availability and timing. Maybe it's manufacturing, maybe it's the car industry doing the same thing.

Michael: Anything. Even components.

Krista: Whatever it is, if you're manufacturing widgets, there's push and pull that's just how the industry works. I don't think building is unique in that regard.

Michael: Even our components, the door manufacturer is dealing with the same things. They're three or four degrees removed, the house a hundred degrees removed, but it ratchets up. It's like how a small gear can turn a huge gear, slowly turning and affecting things way down the road. And it's the economy at large. Growth begets growth. That's never been more obvious. If you were on planet Earth between 2020 and 2026, you saw it, when things started to grow, you couldn't get a car because everyone had money, from their jobs or stimulus or their businesses doing well.

Krista: Regardless of the industry.

Michael: Home values went up, and because you had all this equity you were competing with other buyers, and then buying toys, boats, things. I remember when they reopened the Strip you couldn't even exit off Tropicana, it was so backed up. Channel 5 did a spot on it, all these people coming to get out of California for the weekend because the casinos and restaurants were open and they could live a little normal life. So it boomerangs back quickly.

Krista: Right. And then you think about the Department of Transportation and the roads they had to build to accommodate it, dealing with the same push and pull of economic growth. It's a factor everywhere.

Michael: It is. To put a pin in the build-to-suit question: using the road trip analogy, you're never going to time your trip with the cheapest gas of the year, and you'll never time your build with the most favorable costs. I didn't go into 2025 thinking it would be one of the most favorable years of my career for negotiating with vendors and suppliers. I didn't know that. I left for the road trip when gas was $5 a gallon and it ended up being $3.75. And I get it, this is their retirement home, probably the last home they'll build, and they're putting a lot into it. It's a very fair question, everyone who's ever contracted has asked it.

Krista: It is a fair question.

Michael: So I think that's it.

Krista: You said you'll never time the road trip, but never is a stretch, you might, but it's a lucky chance. We can't bank on it or pretend it could happen. Let's look at the biggest picture we can, the worst-case scenario or what we're currently basing it on, and if we happen to strike gold and it's cheap that day, all the better. But we don't want to make promises based on a formula we can't control.

Michael: Right.

Krista: Out of what is otherwise a formula we can't control.

Michael: All we can use are the factors that will affect it, and that's the message I hoped to convey to this great couple. Using the road trip analogy, if you're leaving on Memorial Day weekend, you're probably going to pay more for hotels, gas, and services, and everything's busier. So I can't guarantee, but I can look at other factors and say it's probably going to be as favorable as it's going to get for you now. In the next three to 12 months, I feel it's probably not going to get friendlier in terms of the cost of building a home.

Krista: Yep.

Michael: As a company, I'm trying to lock in as much as I can now, price-wise, and keep these vendor relationships really solid, because I feel we're probably going to run into an inventory shortage this time next year if we have the kind of sales year I think we will. Builders are going to be caught off guard, they've reduced their permits tremendously.

Krista: Sure.

Michael: Most of the big builders by 15% or more, so starts are down. This is probably our last year to bask in the sunshine, and I think 2027 could be a challenging year as a builder in terms of the build prices we've gotten used to, not sales prices, build prices.

Krista: Starts are down. Right.

Michael: I've kind of gotten spoiled now.

Krista: Build prices, yes, and one affects the other. They don't work independently. If it costs more to build, that's reflected in the total sales price. As a company with land out in front of us, those are the things you pay attention to, because you're building on land that will have to fit whatever best-case scenario we can hope for at the time.

Michael: Well, that flows effortlessly into our next project, but I think we should save that for another episode.

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