If you are in the market for any type of wood—from plywood or sheeting to standard 2x4s, be prepared for a massive sticker shock. U.S. lumber futures contracts for May 2021 delivery were priced at $1,645 per 1,000 board feet, about 60% higher than they were a month ago and 374% above the $347 contract price average in May 2020. This marks the fastest rise since the housing boom that followed World War II.
With a shortage of inventory of homes for sale in pretty much every U.S. market, the construction industry had risen. But with lumber prices soaring, starts are well below their previous highs.
Why are prices rising so rapidly?
Part of the rise in prices is due to the classic supply and demand conundrum- there is much more demand than supply available.
Housing demand was already high pre-pandemic. The demand was further fueled during the pandemic when the country was sent home from work. Stuck at home, unable to vacation and with time and money on their hands, people headed to the local building supply dealers for the materials to build decks, play structures, she-sheds and more.
Some even added additional rooms as a large percentage of the workforce looked to adapt homes into more useful spaces to accommodate working from home and remote learning.
Untethered to a physical office, people also looked at the affordability of migrating to suburbs and rural areas, where they could have more breathing room for less money. With little for-sale inventory, prospective buyers increasingly looked to the new home market, and builders are struggling to keep pace.
Meanwhile, on the supply side, there was an abrupt shutdown of sawmills in the United States and Canada. Home building was deemed essential in most parts of the country, so demand didn’t wane. But the lumber industry was slow to reopen. Some operations did not survive the pandemic. Those that did struggle to find workers. A shortage of industry truck drivers and higher diesel fuel prices make it less profitable to transport timber to the smaller number of mills.
Then there are economic factors- the previous weakness of the dollar relative to the euro and Canadian dollar contributed to the rise in prices. Factors impacting trade escalated import prices by 80% over the past year.
There was also a lack of preparedness. You would think a major dip in the economy would devastate the new housing market. In fact, housing demand proved surprisingly resilient during the pandemic and increased abruptly during the second half of last year. Building products producers that anticipated a protracted slow down were caught be surprise.
Meanwhile, beetle infestations had wreaked havoc on Canadian lumber supplies. The mountain pine beetle has destroyed an estimated 15 years of lumber supplies in British Columbia, Alberta and the Pacific Northwest. The Pacific Northwest has lost massive acres of timber to wildfires. One industry estimate is that the fires burned or damaged trees that might have produced 15 billion board feet of timber.
Consumers are not only facing higher prices but also longer wait times. The National Association of Home Builders estimates that higher lumber prices have increased the cost of the average new single-family home by nearly $36,000 (an average across all U.S. markets). Developers have a difficult time estimating costs, and have delayed says in new housing developments and condominium buildings. Builders are looking for alternative materials, which could be good to fuel demand for newer eco-friendly solutions like bamboo and hempcrete, but take time to develop.
Overall, the unprecedented spike in lumber prices poses an enormous challenge for the construction industry. In addition to ascending lumber costs, builders are having to contend with rising prices for many other materials, including copper, steel, household appliances and cabinets.
When will it end?
Supply shortages should ease somewhat later this year, as COVID risks recede further and more sawmills reopen in the Pacific Northwest. Imports from Central Europe and Scandinavia are helping make up part of the shortfall, but a weaker dollar makes those imports more expensive. Reducing tariffs could help. A quick resolution to the industry’s supply woes by building new sawmills is unlikely, however, as construction of a new plant is a capital-intensive process that often takes years.
There are a couple of positives if you plan on building this year. Lumber is only a small percentage of the overall cost to build a home. Interest rates to purchase or build a home are still at historic lows. This means even if your costs are higher, your monthly loan payment will be the same as during a period with average interest rates.
Industry experts expect prices to remain high for another couple of years, then drop back to more normal levels. As mortgage rates increase, we will likely see lumber prices decline, as that factor will balance demand. In the meantime, do-it-yourselfers may want to put off new projects.