A contractor's nightmare: low demand, high costs

Already dealing with plunging new home sales figures, construction firms in Minnesota are now facing another problem: an unexpected surge in lumber prices.

Government figures released for January show the sale of newly built homes that month sank to the lowest level on record. On top of that, lumber prices unexpectedly surged in January and February.

HIGH COSTS CUT INTO BOTTOM LINE

Duane Lewis, a small-time construction contractor in Bagley, Minn., won a project last fall when lumber prices were flat, but when he began building the house in January, local lumber prices shot up as much as 20 percent. Nationally, they jumped about 30 percent on the futures market.

"It's a huge risk. If we bid a house and the material goes up 10 percent, that comes out of our pocket," he said. "If the price goes up, I have to pay it, and it just comes out of our bottom dollar."

That bottom dollar profit for Lewis and other contractors has been getting thinner and thinner because few people are building homes these days. In a good year, Lewis and his employees build more than a dozen homes, but last year, Lewis didn't build a single one.

When a building project does come along, Lewis says contractors are willing to drastically cut their profit margin just to win the bid.

"It's extremely competitive. There's not a lot of work out there, so everybody is doing whatever they can to make a dollar," he said.

A few years ago, the price of lumber dropped sharply as the recession kicked in and U.S. construction slowed to a crawl. Since then, lumber prices have been mostly flat.

Gary Vitale, president of the North American Wholesale Lumber Association, said the recent surge in lumber prices is a simple case of supply and demand.

"Most of the retailers and most of the wholesalers have run their inventories down to historic lows, and then with the curtailment of the production at the lumber mill level, what started to happen was as demand increased even a little bit, there was a spike in the prices," Vitale said.

Those prices have since leveled out a bit. Experts predict prices will stay higher than they were last year, but still far below what they were before the recession.

WHAT WILL THE FUTURE BRING?

The big question now is whether the spring construction season shows signs of new life. Some indicators show promising signs the economy may be recovering, but since the number of new homes in January was the lowest level since the federal government began keeping track in 1963, there's not a lot of optimism.

Still, the National Association of Home Builders projects business will increase by 20 percent over this year and into next. Spokesman Stephen Melman said many potential home buyers are interested in taking advantage of a federal tax credit that expires this spring.

"If new home demand picked up, that would be the good news for everyone, because that would mean some more confidence in the economy and generate demand from the lumber mills," Melman said.

For lumber mills, the increase in lumber prices earlier this year is actually good news. Mills in Minnesota have been devastated by the recession. A number of them have been shuttered indefinitely, and a few large mills were permanently closed and the properties sold off.

Wayne Brandt, executive vice president of the Minnesota Timber Producers and Minnesota Forest Industries trade organizations, said the price surge provides a ray of hope for those mills still hanging on.

"I think it's too early to get wildly optimistic, but certainly a strengthening of that market is good news for northern Minnesota, good for the sawmills in our state," Brandt said. "Whether or not it's sustainable remains to be seen."

Last week state officials released some news that's good for both lumber suppliers and builders.

Minnesota employers added nearly 16,000 jobs in January. That includes the addition of more than 2,000 construction jobs.

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