Builders and home buyers paid the price as supplies dropped, but the outlook for new construction is improving.
COVID-19 dramatically disrupted the lumber supply chain affecting home building.
Lumber prices have been highly volatile since the spring.
An uptick in home remodeling has further squeezed the lumber market and contributed to rising prices.
By Daniel Bortz
Last spring, the coronavirus pandemic ground several large lumber mills in the U.S. to a halt—and homebuilders suffered the consequences.
Take Jesse Fowler, for example. Fowler, the president of Tellus Design + Build, a full-service general contractor based in Southern California, said in an interview with REALTOR® Magazine in November that lumber prices for his company had “gone through the roof.” “It’s tough on our business because we have to play the middleman and negotiate lumber prices for our clients,” Fowler said. In one instance, he said, a framer charged one of his clients who was building a new home $90,000 over what was originally estimated to compensate for rising lumber costs.
The COVID-19 crisis and the constraints it has put on the nation’s lumber production aren’t the only factors that have jacked up lumber prices. “Our lumber tariffs with Canada are high, and our domestic lumber industry can’t supply everything that we need,” says Robert Dietz, chief economist at the National Association of Home Builders.
In addition, “the wildfires in the West certainly haven’t helped [lumber production],” says Mike Theunissen, co-owner of Howling Hammer Builders, a custom home builder and remodeler based in Mt. Pleasant, Mich., and chairman of the building materials subcommittee at the NAHB.
Dietz says small homebuilders have had a harder time coping with the price hikes. “Larger builders are feeling less of an impact,” he says.
And optimism is on the rise more broadly. After reaching their peak last September, lumber prices began to fall, according to Monthly Composite Prices reports from industry tracker Random Lengths. “What we had was a shock to the supply system at the start of the pandemic, but now that lumber production has ramped back up, lumber prices have gone back down,” says Mark Rasmussen, a forest economist at Mason, Bruce & Girard, a natural-resources consulting firm, during an interview in early November. Yet just a few weeks later, prices were on the rise again, in response to both favorable building conditions in the fall and suppliers stockpiling materials for an expected busy construction year ahead.
Another bright spot for general contractors: “The remodeling business is busy right now, and you don’t need as many materials when remodeling” as you need to build a new home, Theunissen says.
However, with Americans spending a lot more time at home, many people are taking on home improvement projects themselves. As of mid-August, 61% of U.S. homeowners said they’d taken on a home improvement project since March 1, a NerdWallet survey found. Shawn Church, editor of Random Lengths, says the do-it-yourself remodeling boom contributed to rising lumber prices. “The strong DIY activity generated a demand for wood products that left supply and demand in an acute imbalance,” he says. “Wood products prices surged as a result.”
When lumber costs surged, Theunissen says, his company was forced to make some changes. “We started putting escalation clauses into our contracts for lumber,” he says. “For example, a contract might say that if lumber costs rise by more than 10% before our work is performed, then the customer must pay the difference... We hate to invoke escalation clauses, but there’s only so much we can absorb,” he adds. Howling Hammer’s contracts also started allowing for delays in materials delivery. “If it takes an extra four weeks to do a project because materials arrive later than we expected, then that’s just the way it is,” Theunissen says.
The Impact on New-Home Buyers
Of course, rising lumber prices also affect buyers purchasing new homes. Sales prices of new homes have risen sharply over the past year. As of mid-October, higher lumber prices had added $15,800 on average to the price of a new single-family home, Dietz says. According to Census Bureau data, the average sales price of new single-family houses sold in September 2020 was $403,900, up from $384,000 in January.
Homebuilders are grappling with a number of other challenges, Dietz says, most notably labor shortages and tighter mortgage lending requirements for home buyers and homeowners seeking home equity loans or lines of credit.
There’s little evidence that higher prices have kept large numbers of buyers away. Among affluent buyers, the demand for new construction remains high. Hans Wydler, an associate broker at Compass who works with buyers and builders of custom homes in the greater Washington, D.C., area, says, “Buyers [here] don’t care about lumber prices... That’s just not on their radar.”
Some buyers are being priced out, though. “I have a build job going on right now where the cost went up $50K due to the sudden increases in lumber and other building materials,” says Sheila Smith, an agent with RE/MAX Capital City in Boise, Idaho. “Boise is still being flooded with newcomers from bigger metropolitan areas, mostly California. They can afford the higher-priced homes, and our inventory is down 80% from 2019 overall.”
On a national level, housing starts hit a seasonally adjusted annual rate of 1.53 million last October, up 14.2% from October 2019, according to the Census Bureau. Moreover, homebuilder optimism in November hit its third straight record high, according to the NAHB/Wells Fargo Housing Market Index, which has been tracking homebuilder sentiment for 35 years.
Although future lumber prices can be difficult to predict, experts say a couple of actions may be able to curb lumber costs in the U.S. For one, “we need to find ways for the domestic lumber industry to produce more, perhaps through recruiting more workers or through new forest policy,” Dietz says.
Second, the U.S. government must negotiate a better lumber agreement with Canada to address the high lumber tariffs that are currently in place. “That’s been a longstanding issue,” says Dietz, “but I think it can happen sometime in the next two years.”
Lawrence Yun, NAR’s chief economist, sees reason for optimism. “Lumber prices should moderate and decline somewhat in 2021 as a result of more harvesting and a possible reduction in tariffs to foreign products,” he says. “That will help home building and generate local economic growth.”