The demand for lumber is outstripping supply, pushing lumber prices up and, in turn, raising the the price of a typical new home by $24,000. This “perfect storm” of factors will not let up in the short term, according to a chief economist for a national building association.
“Lumber prices should begin to decline later this year, perhaps by the fall. When prices begin to decline, the correction could be significant, especially if mortgage rates rise meaningfully in the context of extraordinarily rapid economic recovery,” said Anirban Basu, chief economist for the Associated Builders and Contractors, a 14,000-member Washington, D.C.-based trade association.
The rise in lumber prices occurred as housing starts in 2020 rose to 1.38 million nationwide, a 7% increase from 2019, even though annualized housing starts plunged to 934,000 in April during the early weeks of the coronavirus pandemic. In Pennsylvania, housing starts also rose 11.5% in 2020, up from 23,539 in 2019 to 26,258, according to the U.S. Census Bureau.
What home building supply companies, home builders and do-it-yourselfers are experiencing has been exacerbated over the past 12 months by the pandemic-related shutdown on the economy, but the seeds for the larger problem were planted more than 12 years ago, Basu said.
Basu dates the current problems to the housing market collapse of 2006, when the subprime mortgage house of cards collapsed. When high-risk buyers defaulted on mortgages and tried to sell properties as housing values plummeted and foreclosures skyrocketed, the inventory of unsold houses rose as lenders made it harder to qualify for mortgages.
Lumber production was unable to keep up with demand at a time of lean inventories, said Contract Lumber, a national building supply company based in Pataskia, Ohio. Softwood lumber consumption grew by 8% in 2020 and is project to rise another 5% this year, Contract Lumber stated earlier this month.
The need for more softwood lumber came when President Trump placed a 20% tariff on Canadian lumber. Implemented in 2017, the tariff was not rolled back until December, when it was dropped to 9%.
Lower interest rates made home ownership more affordable as the inventory of unsold homes fell, prompting “home builders to go into overdrive,” Basu said. Lumber production shut down because of pandemic-related restrictions in some states, and some mills closed as well. Restrictions also forced construction crews to temporarily stop work last spring.
“The supply side was not ready for the demand,” Basu said, so lumber prices in some cases have risen 200% from pre-pandemic levels.
Although the Commerce Department in December reduced tariffs on softwood lumber to 9%, Basu said it will take a while for that price drop to move through the pipeline to the builders.
