Forestry, Wood Products, And Housing
While there are places where the supply of timber is tight, there are others where it’s not at all. What’s vexing people trying to build a deck isn’t really a shortage of trees to be cut down, it’s more a shortage of the processed wood you can actually use — the lumber.
When the pandemic hit in the spring of 2020, many people in the lumber industry assumed business was about to go sour. Millions of people were out of work, businesses across the country were shuttered, and the country was in a recession. And so, producers reacted accordingly.
In actuality, demand never decreased, and in fact, the exact opposite happened: demand for lumber products began increasing as people were remodeling their homes during the pandemic and new homes were being built at levels the US hasn’t seen since before the Great Depression.
New Home Construction Costs
- U.S. home builders started new home construction in March 2021 at a 19% increase from previous months.
The Complexity of the US Housing Market
Healthy demand for housing is a strong indicator that the economy has underlying strength and that consumers feel confident in the economic outlook. Buying a home is one of the biggest financial commitments an individual can make, so if people are willing to buy or build a home, it says a lot about consumer confidence.
- Wood is just one factor in home prices, not the major factor.
- The biggest factor in home prices is supply and demand.
Though you can certainly look at nationwide stats like median home price, sales volume, or the number of homes on the market, the truth is real estate is local. Every city, county, and state has its own unique marketplace, with its own unique buyers, sellers, and trends. There are even different rules and regulations to contend with within each area. Because of this, real estate markets vary greatly depending on locale.
How Big A Factor Is Lumber Cost
- Builders report that the bill for lumber used to frame a typical new home jumped from $35,000 a year ago to $71,000 now
- Homebuilders aren’t the only buyers of lumber, of course. Homeowners renovating their houses also have diverted some of the supply by building fences, decks, and additions.
- Lumber prices skyrocketed more than 300% between April 2020 and May 2021, causing the average price of a new single-family home to increase by nearly $36,000.
Fluctuating Lumber Prices
Wood products prices typically fluctuate more than most goods, because homebuilding can move up or down much faster than sawmill capacity can. Wood products have other uses that are more stable, such as non-residential construction, crates, and pallets, but new housing is the largest usage, followed by home repairs and remodeling, and both of those activities are highly cyclical.
- Producer prices for lumber rose 89.7 percent for the year ended April 2021, the largest 12-month advance since the data were first collected in January 1927
Why Are Lumber Prices Going Up So Much
Wood demand shot up in the summer of the pandemic. Many homeowners were stuck at home, unable to vacation. With time and money on their hands, they headed to the local building supplies dealer for the materials to build decks, playhouses, she-sheds, and even additional rooms.
- COVID-19 has caused an increased demand for lumber, as well as a disruption in supply chains
Then in the autumn of 2020, homebuilders cranked up their construction. By December, single-family housing starts (seasonally adjusted) hit their highest level since 2006. This activity was driven by cheap mortgages.
How Long Will This Go On
- Lumber prices are finally coming back down to earth after a spring where they doubled, then doubled again.
- The quick reversal of lumber’s months-long rally came as Americans started to go on vacations again instead of taking on renovation and building projects.
- Lumber is now a bit more affordable again, but the bad news is you shouldn’t expect a dramatic drop in the price of a new home.
- The cost of construction is still higher than it was a year ago
According to Bill Conerly of Forbes.com: “Lumber and plywood prices typically rise in the spring and drop by the end of fall, by about five percent. This year look for not a decline but a leveling off of lumber prices. Prices will remain high for another two or three years, then drop back to more normal levels. The key to the pace of decline will be mortgage rates. In the meantime, homebuilders will pass the costs along to their buyers.”
Who Are The Winners And Losers
Commodity price changes are capturing headlines, but as those prices change, who are the winners and losers?
home builders, real estate developers, wholesale and retail lumber sellers rely on access to lumber. Window, door, and furniture manufacturers use lumber as a production input. The timber producers and end-user consumers of lumber rely on the supply and demand equation to meet needs at a reasonable price.
Companies that rely on ready access to lumber are being negatively impacted by the supply/demand imbalance. Companies that rely on lumber and wood products in their manufacturing processes, such as window and door manufacturers or furniture manufacturers, are experiencing supply chain disruption and cost increases. Companies that develop and build real estate projects are experiencing similar supply chain disruptions and cost increases.
What it boils down to, is it appears the majority of cost increases for lumber over the past year have been passed directly on to the consumer, or end-user: homeowners and homebuyers. But according to one financial reporter;
“what’s bad for homebuyers has led to stellar results for homebuilder stocks. Beazer Homes USA (BZR) surged 6.7% Monday, settling at $23.81 after the Wall Street firm Sidoti raised its price target to $29 from $24. Despite rising lumber costs, the firm is noting that Beazer has pricing power and isn’t discounting as much through incentives. That means prices are being passed on to buyers.”-https://finance.yahoo.com/news/how-record-high-lumber-prices-are-making-new-homes-less-affordable-152122225.html