Hedging Cost of New Custom Home build

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Topic Author
RubyTuesday
Posts: 1786
Joined: Fri Oct 19, 2012 11:24 am

Hedging Cost of New Custom Home build

Post by RubyTuesday »

We will be building a house over the next 16-18 months.

As everyone knows, there are numerous supply chain issues and a lot of volatility in input costs (lumber, copper, etc).

I know large builders probably trade lumber and copper futures to hedge their risks. I wonder if an individual can do something similar for a single new home.

Does anyone have any knowledge or experience in using financial instruments to hedge these costs?

Thanks in advance for your input.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
Topic Author
RubyTuesday
Posts: 1786
Joined: Fri Oct 19, 2012 11:24 am

Re: Hedging Cost of New Custom Home build

Post by RubyTuesday »

Bumping this in hopes someone has some knowledge or experience in using commodity futures to hedge construction costs.

I’m assuming it would involve lumber and copper futures (other instruments?). I suspect the cost/risk may not be worth it for a single modest project, and I’m interested on intellectual basis whether implementation is feasible or not.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
alex_686
Posts: 10338
Joined: Mon Feb 09, 2015 2:39 pm

Re: Hedging Cost of New Custom Home build

Post by alex_686 »

RubyTuesday wrote: Wed May 11, 2022 4:55 pm I’m assuming it would involve lumber and copper futures (other instruments?). I suspect the cost/risk may not be worth it for a single modest project, and I’m interested on intellectual basis whether implementation is feasible or not.
I work in a tangent field. Everything is going to have to be a proxy hedge so a imprecise hedge. The futures are going to be the wrong size, probably vastly too big.

No good hedges for labor. You are going to need to throw in oil. Work trucks use gas, shingles use asphalt. There are CPI hedges but those are for institutions. You could vaguely replicate something with TIPS.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
TravelforFun
Posts: 2401
Joined: Tue Dec 04, 2012 11:05 pm

Re: Hedging Cost of New Custom Home build

Post by TravelforFun »

RubyTuesday wrote: Tue May 10, 2022 4:47 pm We will be building a house over the next 16-18 months.

As everyone knows, there are numerous supply chain issues and a lot of volatility in input costs (lumber, copper, etc).

I know large builders probably trade lumber and copper futures to hedge their risks. I wonder if an individual can do something similar for a single new home.

Does anyone have any knowledge or experience in using financial instruments to hedge these costs?

Thanks in advance for your input.
I'm building a home right now. They started working on it 6 months ago and the house is only 65% complete. Labor and material shortages are dragging the schedule out. The contract we have with the builder contains a high number of allowances from concrete to framing to countertops because that's how builders protect themselves. Luckily, we have not exceeded any allowance yet. We're in the Dallas-Fort Worth Area.

TravelforFun
Topic Author
RubyTuesday
Posts: 1786
Joined: Fri Oct 19, 2012 11:24 am

Re: Hedging Cost of New Custom Home build

Post by RubyTuesday »

alex_686 wrote: Wed May 11, 2022 5:03 pm
RubyTuesday wrote: Wed May 11, 2022 4:55 pm I’m assuming it would involve lumber and copper futures (other instruments?). I suspect the cost/risk may not be worth it for a single modest project, and I’m interested on intellectual basis whether implementation is feasible or not.
I work in a tangent field. Everything is going to have to be a proxy hedge so a imprecise hedge. The futures are going to be the wrong size, probably vastly too big.

No good hedges for labor. You are going to need to throw in oil. Work trucks use gas, shingles use asphalt. There are CPI hedges but those are for institutions. You could vaguely replicate something with TIPS.
I have most of our fixed income in TIPS and I Bonds (and some stable value), but the TIPS’ duration is a little long to hedge 12-18 month expenses.

I read that CME Group launched a micro copper futures contract that is financially settled. Probably still going outside my wheelhouse, but will continue to monitor the thread and research.

We will likely contract with builder in 2-3 months
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
Oregano
Posts: 335
Joined: Fri Nov 22, 2019 9:30 pm

Re: Hedging Cost of New Custom Home build

Post by Oregano »

RubyTuesday wrote: Tue May 10, 2022 4:47 pm We will be building a house over the next 16-18 months.

As everyone knows, there are numerous supply chain issues and a lot of volatility in input costs (lumber, copper, etc).

I know large builders probably trade lumber and copper futures to hedge their risks. I wonder if an individual can do something similar for a single new home.

Does anyone have any knowledge or experience in using financial instruments to hedge these costs?

Thanks in advance for your input.
There is no practical way to do this. It's even possible that your imperfect hedges will backfire (i.e., you lose money on the hedges even if the building costs rise).
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