Understanding economics in the building materials industry can be like chasing a moving target. But our most recent guest takes the complexity out of that analysis with a non-nonsense, street-level approach. Simon Caron, the Uneducated Economist, joined us to talk about the economy plus key issues the building materials industry faces today.
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This week, Zach and Beth talk with Simon Caron, whose popular Youtube Channel, Uneducated Economist, has more than 46,000 subscribers. Just like in his videos, Simon explains the challenges that today’s construction industry is up against — without making the conversation more complicated than it needs to be.
Understanding the Building Materials Industry
The building materials industry is made up of a lot of moving parts, and for Simon Caron, it helps to break down things simply so that they’re easier to understand.
Simon has worked in the lumber industry for more than a decade, and his approach to understanding the economics of building materials is refreshingly straightforward. “I take these complex issues, and I try and break them down for the average person to understand, so they can have a discussion about it,” explains Simon.
He didn’t expect those discussions to go anywhere, but since launching his YouTube channel in 2017, he’s managed to attract thousands of subscribers and views. His take on the industry is helpful to those who, like him, might not have a degree in business or economics.
His first job was in a lumber yard in Astoria, Oregon. “I started there part-time while in high school working there and did seven years there,” Simon explains. “I worked myself through the different positions, ended up managing the yard portion of things, running dispatch and stuff like that.”
He noticed things slowing down at the lumber yard after working there for several years. “The lumber wasn't going out as fast, it was a lot less deliveries… That's when they sent in some managers to run the place,” says Simon. He assumed they were there to fix things.
“I was thinking, ‘Okay, great. We're going to have some professionals come in here and clean up the books, do whatever we need to do to get this business up and running again,’” says Simon.
But that’s not what happened. “They auctioned off this company and liquidated it within two weeks,” explains Simon.
He went to work at another lumber yard, and the same issues started to develop there. “This was during the dot-com bubble,” he explains. “That lumber yard ended up closing. A few years passed by. I worked construction, I did some other things. The great financial crisis came and blew everything up, and I lost my job working construction.”
Simon worked in a few different lumber companies, and started to notice how they were running their business … and it wasn’t going well for any of them. “I mean, the debts were just far too high and building the store, all the equipment, everything that went into it,” explains Simon.
“We could have sold every 2x4 in the entire county and still not had enough to keep the stores open,” he says. Since then, the lumber industry has seen even more economic fluctuation and hardship.
Simon’s experience in the industry as well as a bit of natural intuition allows him to be sensitive to changes in the environment including downturns or shifts.
What’s Ahead for the Lumber Industry?
Predicting what will happen for building materials in the next couple of months, let alone this year, is a bit shaky. “I have a hard time even trying to know what is going to happen next week,” says Simon.
Simon breaks down what’s happened in the industry’s recent history. “If you go and look at a twenty-year chart of lumber future prices, $300 to $400 per a thousand would be typical,” says Simon.
But the last couple of years have been unprecedented, and prices went up in a significant way when COVID hit in 2020: Lumber went up to $1,000 per a thousand units.
“Really, what occurred there was that all the mills, all the lumber yards, all the builders out there, they all had the same thing going on. It's just like, ‘Oh, man, nobody's going to be doing anything, because we have no idea what's happening,’” explains Simon.
And then people started getting their stimulus checks.
The country went on lockdown, and many homeowners started remodeling projects while they were stuck at home. “The demand for lumber and building supplies really started to increase. It just depleted everything. There was nothing to be had,” recalls Simon. “Pressure-treated lumber was probably the hardest thing for me to try and get my hands on. So many people wanted to do these outdoor projects and there was just nothing to be had.”
After a few months of that, inventory eventually built up again, and prices came down towards the end of summer. Simon expected things to normalize a bit.
But the pandemic and economic crisis has made it difficult to pinpoint what happens next in the lumber industry. “Sheathing right now is selling for $40 a sheet. This typically is $18 a sheet,” explains Simon.
The demand for building materials is still on the rise. “I know the mills had tightened up during the holiday season, that's what they do,” says Simon.
“But the demand side of things seems to be increasing dramatically during the time when it would typically slow down. That is very unusual,” Simon explains. The effects of an unpredictable lumber market have also made it difficult to track what’s going on in real estate, which Simon also addresses on his channel.
The Housing Market in 2021
The state of the housing market looks just as unpredictable as building materials, but Simon explains that shouldn’t be too big a surprise. Many homes for sale are priced fairly high right now, and Simon suggests that this bubble indicates more change.
“This is where it's probably going to get very tricky because, in my opinion, the Federal Reserve is going to try and do something where they keep interest rates incredibly low,” explains Simon.
He points out that giving everyone a low-interest loan will only result in a similar crisis to the one in 2008. “They have to maintain a low-interest rate, but then only provide loans to those who are the most creditworthy and continue to make those payments,” he explains. “Because if they just give it to everybody, then eventually you have a problem like we had back in the great financial crisis.”
Simon expects the Federal Reserve to try and maintain some stability this way. “It's absolutely mandatory for them to keep the housing market stable. They have to do it. If they don't, then they lose control,” he explains.
And the stimulus packages that the country is expecting with Biden’s administration will also have an effect on the housing market since those packages will likely include forbearances for mortgages that would have otherwise put homes in foreclosure.
“That's what I'm seeing, is going to be the new normal of continuous stimulus packages, and maybe rent subsidies or something coming that will never allow that housing market to diminish,” says Simon.
Hope for Good Things Ahead
Keeping people in their homes is a positive for the home improvement and building materials industry. “If you can keep house prices elevated, and the replacement cost of a house is a profitable business, I would only assume that everything would stay elevated, all of the lumber prices,” explains Simon.
We’re keeping our hopes up for the building materials industry. There’s certainly been a lot of damage done: Thousands are still jobless and many companies had to close in this last year.
“The only time that I ever see that there would be a shift into the danger area is if interest rates go up. That's really the only thing that's going to be holding it back. We're at a top, so maintaining a top is going to be very difficult.” says Simon.
We’re certainly looking forward to a brighter, more stable year ahead.
Want Even More Insight?
Those of us in the building materials industry know that change is the only constant we can really expect.
To stay on top of economic trends and insights into the building materials industry, you can check out the Uneducated Economist on YouTube and subscribe to stay informed.
Stay tuned for more predictions, tips and trends in the year head by subscribing to the Smarter Building Materials Marketing podcast.
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