The cost of lumber is going through the roof, and that is hitting the housing industry on all fronts. For homebuilders, renovation contractors and DIYers, the costs of projects is now far higher than it was just a year ago and about to cross into historic territory.
Softwood lumber prices are now about 112% higher than they were a year ago and have jumped 10% in just the past week, according to Random Lengths.
Increased demand for single-family housing, much of it driven by the coronavirus pandemic, has housing starts up 30% year over year, according to the U.S. Census. That is part of the issue on the demand side. There has also been a surge in home remodeling, as people sit at home longer and put money they would have spent on going out or traveling into their homes and properties.
Low interest rates are also playing into lumber prices, heating demand for housing and giving builders more incentive to increase production.
“It’s also worth noting, that durable goods are continuing to increase, as individuals are buying large appliances and furniture. This is also helping increase lumber prices because a lot of these items are shipped on wooden pallets,” said Joe Sanderson, managing director of natural resources at Domain Timber Advisors, an Atlanta-based timberland investment management organization.
But it’s not just demand that is pushing prices so high. Supply is completely off the mark because both mill operators and lumber dealers misread the 2020 market. Since housing starts and remodeling were weaker in 2019, they pulled back on production. The expectation was that 2020 would be much of the same.
“Covid hits and they get really really scared. You saw construction curtailments across the board,” said Paul Jannke, principal at Forest Economic Advisors.
Then came the totally unexpected boom. Housing turned out to be one of the brightest spots in the economic recovery, with demand coming back swiftly.
The trouble was that the pandemic also made it harder to produce. Some mills have had to limit shift work in order to comply with social distancing rules.
In addition, lumber dealers didn’t exactly believe demand would stay as strong as it was after last summer, explained Jannke, so they let their inventory drop to record low levels in the fall.
When they saw new demand in January, they went to the mills, and the mills didn’t have enough, because they’re just not operating at full capacity anymore.
“After a decade of weak housing starts, the industry adjusted its production to meet that weak level of starts, and now demand is quite a bit higher than that, and so the supply just simply doesn’t exist to meet current levels of demand,” said Jannke.
That has sent prices skywards.
The problem is particularly acute in the remodeling business, because the pandemic has caused so many people to want to add additional space, especially outside. Contractors and design firms are caught in the middle.
“Typically we would review cost of materials on quarterly basis and make small adjustments, but because it’s so volatile today, we have to do it every 30 days. We are seeing some lumber products jumping up as much as 25% in a month’s time,” said Rick Matus, senior vice president at Case Architects and Remodelers in Maryland.
“One of the very popular asks from us is can we build a screen porch addition or deck. Compared to two summers ago, a screened porch project, we are probably 15% or 20% more expensive.”
Matus says most people aren’t walking away from projects, just reimagining them. And for those who want it done quickly, that is next to impossible.
All of this has hurt homebuilder sentiment as well, which was at a record high just a few months ago. Higher lumber prices have added over $16,000 to the price of the average newly-built home, according to the National Association of Home Builders. Some estimate the added cost is even more than that.
Builders, however, can only pass on so much of their costs, as buyers can only afford so much. Higher costs will certainly cut into builder profitability and margins. Homebuilder sentiment was at a record high just a few months ago, but higher material prices have caused it to drop recently. There is now anecdotal evidence of some builders laying foundations but pausing because framing costs are so high.
“While housing continues to help lead the economy forward, limited inventory is constraining more robust growth,” said NAHB chief economist Robert Dietz. “A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability.”
The same is true for the remodeling business.
“Favorable interest rates and increased pandemic-related demand for remodeling have given architectural and design firms confidence for Q1 compared with the previous quarter,” said Marine Sargsyan, senior economist at Houzz. “Yet, construction businesses have tempered their expectations slightly as they continue to face supply chain constraints, labor shortages and increasing costs for materials, such as lumber.”