So, what’s causing this increase?
Great question! And while it may seem like an overnight change, we have to look back over the last 10 years to really understand what the market is experiencing right now.
The Great Recessison
That’s right, nearly a decade later and the low lumber production today is actually still being affected by the Great Recession of 2008.
“Today’s shortage has roots in the previous housing boom. New home construction crashed after the housing bubble popped in the mid-2000s. That made sense because the market was badly oversupplied. But the downturn also drove countless sawmills out of business, leaving the industry unprepared for today’s surge in demand.” – CNN
It’s 2021 but our industry is still feeling the after effects. Not only did construction labor have a net migration out of the industry leading to higher labor prices, but some commodities like lumber have not recovered to the peak production levels that we experienced prior to 2008.
Tariffs have played a significant role in the current rise of lumber prices.
Over a year ago, The National Association of Homebuilders (NAHB) was in contact with the Trump Administration regarding the tariff war being waged worldwide. In correspondence with senior administration officials, The NAHB pressed its case on lumber prices, including the call for renewed trade talks with Canada.
In a July 24, 2020 letter to U.S. Trade Representative Robert Lighthizer, Gerald M Howard (NAHB President) said the lumber dispute between the U.S. and Canada “remains unresolved, leading to further disruptions in the consistent supply and availability of lumber for housing.” He said current import duties on Canadian lumber “are aggravating already high lumber prices” and urged Lighthizer to join with Canada on “a workable and long-term solution to a trade dispute that has continued for more than 37 years.”
In 2019, U.S. softwood lumber imports amounted to $4.2 billion dollars. Tariffs remain at 20%, though there is mounting political will to create solutions. Canadian lumber accounts for 83% of lumber imported into the United States annually.
The effect of COVID-19 on the housing industry (and subsequently the lumber industry) is actually a surprising one.
In spring 2020, we were all forced into our homes and told to “stay home” until…. well, the unforeseeable future. We all adapted to a “new normal”, which brought massive shifts in unemployment and the lowest production levels we’ve seen in years. Home builders were no exception. We also had our own doubts about the future.
However, little did we know… the pandemic would increase demand for new homes!
Homeowners suddenly found themselves homeschooling, and working from home, and cooking at home, and not traveling for the first time in… well, most of our lives. Our homes now needed to be multi-functional spaces and demand for home renovation projects increased. In some cases, home renovation wouldn’t even help—Americans began to search for brand new homes that better suited theirs and their family’s changing lifestyles.
This all sounds amazing for the industry! …Right? Well sure, except for the fact that as soon as demand was about to shift, sawmills halted production and unloaded inventory.
Conventional wisdom told the mills to prepare for the worst and the result was a massive cut in production that has not been restored to date, immediately followed by a demand surge.
Okay, so how does this affect the home buyer?
Supply and Demand
You don’t have to venture too far to hear a story about the current robust real estate market; from multiple offers to same day sales to above list pricing. Buyers are plentiful but housing is limited. Naturally, this benefits home builders. More than ever, buyers are coming up short when looking for their perfect home and instead considering the possibility of simply building their perfect home. As you can imagine, this too presents a supply and demand issue which drives prices across the board. The increased demand for new housing has also increased the demand for lumber, copper, wire, drywall, shingles, and many other products that go into the building of a home. In addition to the competition for labor; framers, electricians, plumbers, roofers, and all other trades.
Currently we are experiencing a nationwide shortage of 2.4M homes. As builders rush to fill that void, pressure is placed on materials and labor. As builders, we are seeing record-high production prices, which means record-high home prices.
A balanced market generally has 6 months of housing supply. The Indianapolis market has been well below that mark for over a year. According to the Metropolitan Indianapolis Board of Realtors, Indianapolis currently has just 1.8 months worth of housing supply.
It’s easy math… more buyers + fewer homes = price inflation.
The supply and demand curve is only one factor in the equation. As a result of everything mentioned above (we know, it’s a lot… but hang with us), the cost of inputs is increasing on an unprecedented scale, at an unprecedented rate. But you came here to learn about lumber, so let’s talk about it.
The lumber industry has been more volatile in the last few months than ever before. It’s all over the news and social media, but what exactly does it all mean? Visual Capitalist does a great job of presenting the data visually.
First, a look at the 25 year history of lumber prices that traditionally show some volatility.
NOTE: The charts above are representative of long length lumber only and do not take into consideration the cost of the roof decking, wall sheathing, I-joists, floor decking and other wood components that are part of new home construction. The total cost of wood components in a new home today are in the $50k and $60k range vs. $18-$20K just a year ago.
Compared to just one year ago, the measure of 1,000 board feet of lumber has gone from $343 to over a whopping $1,635 as of May 5th, 2021. An average 2,300 square foot new home takes roughly 13,000 to 14,000 board feet of lumber to build.
Put another way… one year ago, builders were able to buy roughly 10 houses worth of lumber for $50,000. Today builders can only buy a little over 2 houses worth of lumber for the same $50,000.
What’s in the future?
Well, we don’t have a crystal ball, but we know this industry pretty well and we’re determined to weather this uncertainty with optimism. According to Fortune Magazine, the home building industry is 10 months into what looks to be an 18- to 24-month housing cycle. And Bloomberg News predicts that the latter part of 2021 will see prices moderating, though not falling.
With prices moderating later in the year, we’ll also see the economy heating up and potentially bringing some interest rate increases.
We believe in a transparent, consultative approach when working with our customers. Our goal is to provide you with all of the information we know and arming you with knowledge to make the best decisions for your family and your future. Our sales consultants remain ready to discuss the housing market and to discuss the plans of our prospects as they make one of the most important financial decisions of their lives.
We would be honored to meet with you to help you in your decision making process!