Why Lumber Prices are Spiking

by | Jul 5, 2021 | Construction

Lumber prices in the United States are up more than 200% compared to a year ago creating an economic bubble, the likes of which have not been seen before in the industry. This sharp rise in price not only means that Americans are paying more for this commodity, but the increase has created a rippling affect new home builds to renovations and even other building material industries.

While the COVID-19 pandemic was the tipping point that led to this bubble, simply blaming the pandemic itself is an oversimplification. Rather there was a perfect storm of factors set off during the COVID-19 pandemic contributing to the historic rise in prices.

First, is the continued fallout from the 2008 Great Recession. During the Recession and the subsequent housing bubble burst, more than 30 large sawmills in the United States closed their doors due to decreased demand. This “right-sizing” of the industry was sufficient as the economy slowly grew over the decade following the Recession, but the industry did not have enough capacity to handle the demand of consumers during COVID-19.

Second, 20% tariffs on lumber imported from Canada beginning in 2017 further limited supply. The Trump administration instituted these tariffs to combat the Canadian government subsidizing its timber industry. When lumber prices started to increase in the summer of 2020, the Trump administration cut the tariff to 9%, where it stands today. However, the tariff is still a barrier to Canadian lumber being priced at similar levels as their U.S. competitors.

Third, and probably most obvious was that nearly all sawmills were either closed or limited at the start of the COVID-19 pandemic as they were not considered “essential services.”  While lumbermills may not have been producing usable lumber, consumers were still demanding it. With millions of people confined to their homes, overall demand for lumber increased as many rushed to Home Depot and Lowe’s to buy up materials for do-it-yourself projects.  But even when the lumbermills resumed production, opening this industry back up is not like flipping a switch. Getting the supply chain moving again takes time, and even today, the National Association of Home Builders is reporting that builders are having to wait upwards of three months to have their orders filled in certain parts of the country due to supply shortages.

Fourth, the workforce fallout from COVID-19. Not only was it detrimental to the industry that lumbermills were shuttered for several months because they weren’t considered “essential,” but there is not enough labor to work the sawmills that are open at full capacity. This has led wages for sawmill workers up more than 10% over the past year. Further complicating the matter are issues down the supply chain, from a truck driver shortage to the increasing cost of diesel fuel, all of these have helped increase the cost of overhead on lumbermills.

Impact on the Housing Market

In no industry has this rising cost of lumber been more apparent than housing market. For new home builds the increase in lumber cost alone has meant the average price of a new single-family home has increased by nearly $36,000, on average. This steep rise in cost has led some customers to try and wait out the spike in prices. For instance, in May, the number of new homes that contractors obtained permits to build but did not begin work on rose 53% compared to a year ago, according to the U.S. Census Bureau. This is the highest figure on record.

For the existing home market, the spike in the cost of new builds has led to an influx of customers competing for existing homes. According to the National Association of Realtors, with more competition, the cost of existing homes are up more than 18% year-over-year, and house inventories are down nearly 38%. The competitive market has particularly affected entry-level buyers as they are finding that the dream of owning a house is unobtainable even with low-interest rates. The share of home sales lower than $300,000 before the pandemic was 44%, while this May dropped to 26%.

What Does the Future of Lumber Prices Look Like?

Lumber prices have fallen over the last month from a high of $1,645 per 1,000 board feet (BF) to a price of about $1,000 BF. Lumber today is still significantly higher than pre-pandemic prices, which hovered between $400-$475 per 1,000 BF.

The price reduction is likely a sign that the so-called lumber bubble has already burst. Mortgage rates are slowly beginning to climb, existing home inventories have increased over the last several months, and lumbermills are responding to the demand by investing in expanding their capacity. For instance, West Fraser Timber, announced it will spend upwards of $150 million at five of its mills in the Southern United States to boost output.

With the bubble seemingly to have burst, the question then becomes how long before lumber prices begin to fall. Even with decreasing prices, lumber futures remain nearly three times what is typical for this time of year. This figure points to the conclusion that traders are optimistic that lumber will remain higher than pre-pandemic levels, primarily driven by the strong housing market.

If the COVID-19 pandemic has taught us anything, it is that nothing is truly predictable. But one sure bet is that lumber prices will continue to fluctuate for the foreseeable future as the U.S. economy reemerges.