With dining out, traveling, and other discretionary spending off-limits for much of the last 16 months, consumers turned their spending sights elsewhere: their homes. Most of their money was allocated to long-put-off renovations, office additions, and new decks.
Meanwhile, the pandemic has been a boon for contractors, many of whom have had to turn down projects. COVID-19 has also been rocket fuel for commodities and materials, which have ballooned in price since early 2020. Of all the commodities, however, lumber has grabbed the headlines with its meteoric rise. What caused this volatility, and where are we headed for the rest of the year? Read on to find out.
Price Increases Across the Board
According to the National Association of Homebuilders, lumber prices increased by over 300% between April 2020 and May 2021, adding a whopping $36,000 to the cost of a new single-family home.
For example, in February 2020, the price of 1,000 board feet of lumber was $400, and it topped out at nearly $1,700 in May 2020. To put it in perspective, $500 is generally considered a respectable price for producers, and the price has generally oscillated between $200 and $400 over the last thirty years.
What’s Moving Prices?
The main culprit behind the price spikes is simple economics—a sharp imbalance between supply and demand. In the early days of the pandemic, a risk-off attitude swept the lumber industry once the scope and implications of COVID-19 materialized. This situation set off an unforeseen chain of events that hammered supply and intensified demand.
The lumber supply chain is complex and has long lead times. Wood must be purchased well in advance of delivery, and volatile prices make this a risky proposition. On one end, you have the producers, i.e., the sawmills, and on the other, you have the end-users, i.e., homebuilders and contractors. In the middle sit the lumber dealers, who act as a liaison between the sawmills and lumberyards.
When the pandemic hit, all the players in the lumber logistics chain anticipated (wrongly) that demand would drop. As a result, they sold inventory and cut their orders. Likewise, sawmills began operating at a reduced capacity as they implemented new safety protocols.
According to forest economist Eric Kingsley, “The assumption was that housing starts, which is where most of the lumber goes, would decline. That turned out to be false.”
While supply was dwindling, insatiable demand was taking root. Indeed, historically low interest rates juiced household spending, while a housing shortage stemming from 2008’s Great Recession put pressure on homebuilders to increase supply. These factors caught the industry off guard, and it has struggled to keep up. And as previously noted, consumer dollars were being funneled into home improvements.
There is good news, though: the economy is returning to normal, as are people’s traditional spending habits. Demand is ebbing, and supply is catching up.
For contractors, homebuilders, and homebuyers, the consequences have been acute. When contracts are drafted, the builder or the homeowner (and sometimes both) usually share the cost increases. If the average new home is $36,000 more expensive than expected, someone must absorb that cost. Sticky and conflictual situations ensue…
Likewise, theft from lumber yards is rampant, as several businesses in Texas recently discovered.
The Outlook for the Rest of 2021
At the time of writing, lumber prices are well off their May 2021 highs and trading around $530 per 1,000 board foot. That’s still a good price for producers, and above the thirty-year historical average. And for end-users, it’s a much more palatable price.
That said, despite the downward trend since May, industry experts don’t see prices dropping to pre-pandemic levels any time soon.
In an interview with Bloomberg, the CEO of Ohio’s Westline Capital Strategies noted that “[…] lumber futures prices will continue to see severe, two-sided volatility vacillating in a more extreme price range of $550 to $1,200 for the remainder of 2021.”
Such predictions must be taken with a grain of salt, however, since any number of unforeseen circumstances may arise. These include forest fires, railway backlogs, and shifting consumer-spending habits.
One thing does appear likely, though: prices will stay above historical averages for the foreseeable future.
For more articles like this, be sure to stay tuned to the Sekure blog.