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. I'm here with Michael. And we've
been talking a lot lately about vendors and vendor
pricing and having a conversation about it. We
thought we'd turn on the cameras, let you guys
join us for this conversation. There's a lot
of really good information. I know Michael's
pulled some data to share too. Great topic and
an opportunity to share a little insight with
you guys. So thanks for joining us today. And
hi, Michael. Hello. Hi. How you doing? Good to
see you. Good lead -in. And this is on the heels
of a conversation that we had with a potential
build the suit client who's building a very luxurious
home in South Shore Country Club. But it's a
conversation I've had with almost every build
the suit client ever. And it's, is it a good
time to build? Uh, what are prices like? Do you
think prices are going to come down? Do you think
we're going to be midway through construction
and prices are going to shoot up? And I think
some of that is, you know, our battle wounds
from COVID era. They may have heard horror stories
of their friends who were in middle of remodels
or construction projects or whatever. And the
price of lumber shoots up 300 % in a two week
period. Um, we were building homes during that
time as a company and I bought many overpriced
lumber packages for homes. And I that's a stinging
feeling, right? Yeah, your slabs poured and yeah,
if you wanted lumber, you had to overpay, you
had to pay. And everyone was doing it. And you
couldn't readjust until several months later,
when you say if you're a production builder,
well, let's pull back on the next few phases
or raise our prices. Because we've published
all these prices and based on these build costs.
And now the costs are 2030 % higher in a two
month period, cumulatively. So I think people,
you know, I was never a big builder. Not that
I'm the one now, but I was never the builder
pre -COVID really. I mean, we built a lot of
spec homes, but we never did any build to suit
contracts. So I don't know if those questions
came up in the early 2010s and the early aughts
and the early teens. But I can tell you that
as I started a build to suit division of the
company, it definitely has always been a question.
And I never know how to answer it. Um, because
if I had all the answers, I would adjust my business
model accordingly. So I just go off of the info
that I have and the predictions that my magic
eight ball tell me and, uh, give them those insights
and say, look, I'm still pulling permits. I'm
still building neighborhoods. I'm still moving
full steam ahead. I am cautious about this because
of X, Y, and Z and Now, this person asked this
yesterday, so it's late January 2026, and my
answer was 25 was very favorable for builders
in terms of price indexes or 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. Demand was
down even in the commercial sector, for sure
the office sector. So we had just a kind of a
contraction in the construction industry that
was really only bolstered probably by data centers,
maybe distribution centers. So consequently,
we didn't see pullbacks in drywall and concrete,
because those are kind of fungible items that
are used in a lot of applications. But we did
see things. I think you see a pullback in lumber
prices, because lumber is generally a residential
building product. You're not seeing that a lot
of lumber in data centers and things like that.
Versus steel in a more commercial application.
Yeah, versus steel. And there's still some build
-back cutters spending on infrastructure. So
there's upward pressure on rebar and concrete.
asphalt and things that we had those funds from
2022 from that bill set aside that we're still
spending on that. A lot of those were 10 year,
you know, projects or funds that we're going
to trickle in over 10 years. So that did give
some of a backstop to construction prices and
some of the 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. where things were
artificially elevated. So just to give perspective
on that, however, we're still we're at about
$600 per thousand board feet for lumber to use
lumber as an indicator. And pre COVID, that was
around $300, maybe 350. And we never got that
low. Again, we dipped into the low for and the
mid 400s. in mid -2024 and have kind of hovered
around there with random spikes around tariff
scares and other kind of black swan events. So
it shows you that we've still got nowhere near.
I mean, 470 sounds close to 300, but it's a 50
% increase if you think about it that way in
terms of percentage increase. And right now we're
at 600, which is a 100 % increase from pre -COVID.
Now for context for our viewers or listeners,
I have paid as high as $1 ,700 per 1 ,000 bore
feet, which is right around the peak because
my timing is impeccable. And I wanted the braggart
to say I bought lumber at the peak. You said
that before. I feel like I think I set that peak.
I think that was my purchase. So we're still
at about a third of where we were in 2021, which
is good. I mean, that shows you that lumber at
least, which also dictates trusses. OSB is oriented
strand board. So it's basically just wood scraps
glued together in sheets, not necessarily plywood,
but it kind of looks like plywood or is a proxy
for plywood. So other things that pushed up OSB,
it's an extra step beyond the milling process
and it uses a lot of glue. So if there's glue
and resin increases, so we haven't seen. those
commodities that wasn't available during a certain
period. So OSB, that's otherwise a very affordable
product type and kind of a low -end product,
suddenly you couldn't get the resin to hold it
together. So it became super expensive and hard
to get. And you just don't realize how often
you use that kind of product until it's not available.
Until it's not available and until you're paying
through the nose for it. And it's funny because
It was there was a time when it actually because
it uses so much more resin. It was more expensive
than plywood Which is a way higher quality product.
Yeah And it's still come down, but the gap is
closed for sure and plywood does use resins too,
but just not nearly as much so Again lumber is
just one aspect everyone thinks Oh lumber is
like 20 % of the house budget. No, it's it's
not even 10 % It's on our custom builds. It's
about 4 % the lumber package. Maybe people are
always shocked by that And we did that episode,
um, in the first season where we talked about
it and we got so much feedback and so many comments
from it because it was people who were like,
are you sure that can't be right? Yeah. It's
not as big a chunk as you imagine it to be. No,
it is. Uh, like I said, the lumber and trusses,
maybe if you include the trusses, maybe five
to 6 % of the total construction budget and framing
is about five to 6 % of the total construction
budget. If that honestly between the two, about
10%. So that shows you everything else. We spend
as much in engineering, architectural and permitting
and impact fees on a custom home as we do a lumber
package. So that gives you a kind of a good idea
at current lumber prices. So you can see how
convoluted it is. And there's so many aspects.
So if we're, you know, that's probably the most
volatile commodity that goes into residential
construction. would be your lumber prices. Concrete's
relatively stable. You'll see random price spikes.
Like I said, there's so many backstops for concrete.
And it's so, trees are harvested, right? And
it's very long downstream before it becomes lumber.
So that ball kind of is bouncing long before.
So that means the supply is largely fixed one
way or another. So the only thing that affects
the pricing is the demand. Whereas concrete and
other suppliers can throttle down the supply
to match demand, so they become much more balanced
markets. You know, concrete doesn't expire. I
mean, I'm not saying that lumber does, but the
Portland cement and all the things that go into
making concrete, it's pretty much ready mix.
We make it the day we need it largely, right?
So... It can sit there. It doesn't expire the
way that lumber can only sit in a lumber yard
rendered ready to go for so long before it starts
to rot. And before it starts to become... I hadn't
thought about the storage part of it. Yeah. And
the harvesting is a factory process. So generally
they're harvesting regardless of demand. And
they need to make room for new trees because
there's a sweet spot with Douglas for it to harvest
it. So... And it has to age, it has to be a certain,
you know, it can't be too soft, but it can't
be too, you know, too old or brittle. Right.
So those are the things that kind of keep it
volatile. Oh, the other things can be brought
down. Stucco in the, you know, out west, since
stucco is largely the material we use to clad
our houses, stucco is... Concrete product more
or less. So that's relatively stable windows
are three degrees removed. It's not a raw good
I mean lumber is not necessarily raw. It needs
that rendering step and the transporting but
windows are a production item right there a consumer
good Where I don't really see lumber as a consumer
good it goes I could think of it more as a commodity
so Window manufacturers can just dial down a
factory right there and a lot of those windows
are made to order anyway, so windows Things like
doors and trim. Those are really durable So they
can sit in storage, you know, no one's gonna
want to hold seven houses worth of doors But
doors are only about four different sizes in
general a few different jam sizes And then they're
built with you know, they're made pre hung doors
to order so the jams lay flat i mean think about
how many doors you can store you can store hundreds
of thousands of dollars worth of doors in one
little warehouse in in one city so imagine times
you know times the whole country so finished
goods are largely stable really all you have
to look out for are softness in in the market
to where you can pick up on a deal on doors flooring,
where a vendor is more motivated to clear his
stock. 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 build, which again is not nothing.
But that's saying we saved and we timed everything
right. When we are ready for Windows. the window
guy was ready to make a deal. The kind of windows
you chose were windows that are not made to order,
that there are willing to will and deal. So the
product has to match your specifications. The
timing has to match that is very unlikely that
it would hit every single item, which would be
what it would take to save 10%. So things like
lumber, drywall, again, drywall is very stable
for the most part. You're not going to be able
to time that right. You're not going to be able
to say, well, I really 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're going to go when the gas is at its
30 -day low. And usually that's backwards looking
anyway, because you're going to say, oh, I bought
it for $3 .35 a gallon and then the next day
it was $3 .25 a gallon. Damn it, I wish I wouldn't
have gone on that trip. You're not going to look
at it that way. And you're not going to head
out on the trip without knowing that there's
a potential that's going to be more expensive
than you want it to be. And the same is true
with building a home. Exactly. Yeah, I agree.
So those are the conversations. And when you're
a build -to -sell builder, we largely are a build
-to -sell builder. We don't do a ton of build
-to -sue just because that is a smaller market,
number one. And number two, there's more people
who do bespoke custom homes and don't do any
build -to -sell. So it's not a huge part of our
business. We love it. We love those types of
clients. but it's not a huge part of our business.
So largely I'm making these decisions as it pertains
to build the cell, right? And the same way that
windows or cabinets or appliances are kind of
just made and they have a little bit of an expiration
date, but not really. But my point is that if
Whirlpool is making a thousand refrigerators
and the demand is soft, they're just going to
have to discount those refrigerators. Because
they're not going to sit on 101 refrigerators,
right? They're not going to be there to smash
the record to say, we sold that side by side.
Once it's made, you got to get it moving, right?
So that's kind of how homes are. If a window
is 3 degrees removed from a raw material, but
a house is probably 100 degrees removed on a
unique lot, it's a unique design for the most
part. Right. And because of what we build, because
we're in a more luxury market, you're not going
to buy, you know, 100 fridges when the price
is right because that's not the same fridge we
use in every home So we're not doing that manufactured
production cookie -cutter situation where this
fridge goes in every house We're gonna stock
up and get a warehouse warehouse fees will cover
whatever it would have cost. Otherwise, it's
not feasible Let let appliance by design let
one of our appliance vendors deal with that right
story story so When I was recounting these things
with him, it's just a case by case basis. Okay,
we're ready for appliances. Let me call Appliance
by Design and say, hey, what is Thermador running
right now if we were to combine two dishwashers
or whatever? Is there anything special? And every
now and then you'll just catch a really good
deal. But again, we're talking on a $2 million
bill. Okay, well 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, but it
adds up because we've got a few of those in the
home and now your margin matches. Our build costs
today are approximately, we've gotten better
at building homes. We've gotten better at sourcing
materials. We've gotten more leverage with our
vendors. We built in a soft build year and it
resulted in our build costs are about 20 % lower
than they were in 22 and 23. And that's a function
of a lot of things. It is. We did build one house
this 24 that we built in 21, the same model match.
And we were into that home for about 12 % less
than we were in 21. And it was a nicer spec level.
So it shows you that even apples to apples we
are probably as a company about 15 % better off.
21 was also a hard. Cluthier, things were hard
to get and everything was expensive and the market
was booming in a different way. Undoubtedly a
high watermark, 21. But that being said, let's
just say over mean reversion, we've kind of gone,
you know, we're getting closer and closer to
what I would say normal build cycle or build
costs. And I think we've kind of settled into
where they land. So then as a builder, especially
a build to sell builder, you have to value engineer
your homes. You have to squeeze your vendors
and hope that the market stays friendly to builders.
And as we're also, every home we build is largely
home we sell, has friendly to sellers. So 25,
it flipped and it's not so friendly to sellers,
but it became friendly to builders. So it was
a yin and a yang. It definitely was probably
an equivalent pullback, right? So has that pulled
back? It stands to reason because we were in
a market with a lot of production builders. So
we have the infrastructure around us with these
suppliers and vendors that are used to catering
to production builders. If they pull back 10%,
we benefit from that. Production builders pull
back 10%. Because the market pulled back 10 %
in terms of demand, not necessarily in prices.
I read we still broke another record on prices
and we're still ended up higher than last year,
higher than 24. So we didn't pull back, but our
demand pulled back for sure. And part of why
the prices had a backstop is because supply shrunk
and builders that can move the market in that
way by how they pull their permits. We had that.
We had that benefit. So it's a hard question
to answer. I think I rambled. with him. And I
think I rambled here. But it made sense. And
the interesting part to me, and this was the
realization that I had in our conversation with
this particular client, is that it doesn't, you
know, I mean, I obviously were in the building
industry. And so that's what I imagine it pertaining
to. But this is a business model that carries
across every industry. And so this particular
client happens to be in the restaurant industry.
And they really this is how this is how we supply
our kitchens this you know these are the commodities
are available the times of it you know and so
maybe it's that or maybe it's manufacturing maybe
it's the car industry and they're doing the same
thing and whatever whatever it is you're you're
manufacturing widgets there's gonna be some push
and pull that is just the way the industry happens
i don't think building is necessarily unique
in that regard no the components the door manufacturer
is dealing with the same things i'm like i said
they're a three degree they're four maybe four
degrees removed, a hundred degrees removed, but
it just ratchets up and it's kind of like how
a gear gets, a small gear can turn a huge gear.
Like it just slowly turns and it affects things
way down the road. And it's the economy at large
too. I mean, you think about it. It does, growth
begets growth that is never been more obvious.
Yes. If you were in... on planet Earth in between
2020 and 2026, you've seen, whoa, when things
started to grow, it really, and then you couldn't
get a car because everyone had all this money
because they were making great money with their
jobs or they had stimulus or whatever. Their
businesses are doing well. They're getting all
this wealth. Home values went up and then because
home values went up, home values went up because
you had all this equity in your home and now
you're competing with other buyers. that you're
buying toys, you're buying boats, you're buying
things, so. Whatever it is, yeah. Clothes, toys,
new services. Yeah, services. They got the hotel
industry. Yeah. Yes. I remember when they opened
the strip, you couldn't even exit off of Tropicana
because it was so backed up. I remember Channel
5 did a spot on it, like, look at all these people
going to... Get out of town get out of California
for the weekend because they heard the casinos
are open or you know The restaurants are open
and we can go live a little bit of a night. It
brings back quickly So that's why and then start
thinking about the Department of Transportation
and the roads they had to build to accommodate
and they're dealing with that same push and pull
of the economic growth and it's just everywhere
To pull back the curtain from the business perspective
so to put a pin in the build -to -suit question
you're never gonna use the road trip analogy.
You're never going to time your road trip with
the cheapest gas for the year. You'll never time
your build with the most favorable. I didn't
go 25 thinking it was gonna be one of the most
favorable years in my career as a builder in
terms of negotiating contracts with vendors and
suppliers and the scale. I didn't know that.
So I left for... the road trip when gas was $5
a gallon and ended up being $3 .75, right? And
you just, and I get that this is their retirement
home and they're putting a lot of money into
it and it's probably the last home they'll build.
I get that. And it's a very, very fair question.
Like I said, everyone has asked me this question
that's ever - It is a fair question. So I think
that - You said you're never gonna time it when,
you know, you're never gonna time the road trip.
But never is kind of a stretch. You might. But
it's our lucky chance. We can't bank on that
and let's not try and pretend it could happen.
Let's look at the biggest picture we can, the
worst case scenario or what we think it is or
what we're currently basing it on. And if we
happen to strike gold and it is cheap that day,
great, all the better. But we don't want to make
any promises or take realism out of what is otherwise
a formula we can't control. All we can use, right,
is the factors that will affect it. And that's
kind of, I hope, the message that I conveyed
to this really great couple, that you can look
at other factors. So if we use the road trip
analogy, well, if you're leaving on Memorial
Day, and you're traveling during that weekend,
you're probably going to pay more for hotels,
you're probably going to pay more for gas, you're
probably going to pay more for all your services,
and everything's going to be busier. So yes,
I can't guarantee, but I can look at other factors
and say, It's probably gonna be as favorable
as it's gonna get for you now in the next You
know three to twelve months. I feel that it's
probably not going to get friendlier in terms
of costs when it as it pertains to building a
home And we're using that as a company or I'm
using that you know as as the owner to say I'm
trying to lock in as much as I can now pricing
wise and trying to keep these relationships with
vendors really solid for Sure. Because I do feel
that we're probably going to run into a little
bit of an inventory shortage this time next year
if we have the kind of sales year that I think
we're going to have, because builders are going
to be caught off guard. They've reduced their
permits tremendously, most of the big builders
by 15 % or more. So with that being said... Starts
are down. Yeah, starts are down. That being said...
This is probably our last year to bask in the
sunshine, and I think 27 could be a challenging
year as a builder in terms of the prices that
we've gotten kind of used to. And I'm not talking
sales prices, I'm talking build prices. I've
kind of gotten spoiled now. I mean, one affects
the other. They're not working independently.
If it costs you more to build it, obviously that's
reflected in the total sales price. And as a
company with land out in front of us, those are
the things you're paying attention to because
you're building homes on the land that's going
to have to fall into whatever best -case scenario
we could hope for at the time. Right. It really
flows effortlessly into our next project, but
I think we should separate that to another episode.
Thank you, Michael, for your information and
your time today was a good chat, and we're glad
that we could bring you guys in on it and share
the conversation with you as well. So thanks
for being here, and we'll see you again on the
next episode of Trust the Process Podcast. Thanks.
Bye -bye.