Like many other parts of the U.S. economy, the lumber industry saw prices fall in the spring of 2020 as the COVID-19 pandemic took the country by the throat. Sawmill prices for framing lumber started to fall in the second week of March, and a month later had dropped to their lowest level since the previous summer.
Then something weird started to happen.
Despite ongoing business closures and rising unemployment, lumber prices began to climb. The widely watched Framing Lumber Composite Price index published by Random Lengths bottomed out at $348 on April 10, 2020, and other than an eight-week dip late in the year, it has been on the rise ever since. By the third week of April this year, the index had hit $1188 per 1000 board feet, a record.
Random Lengths’ Structural Panel Composite showed a similar pattern, rising from $349 per 1000 sq. ft. in April 2020 to $1371 a year later.
The unprecedented run-up in prices has affected everything from dimensional framing lumber to building products made with wood components, such as windows and doors. Increases have added nearly $36,000 to the cost of an average new home, according to the National Association of Home Builders. A recent NAHB newsletter said the total cost to a builder for all lumber and manufactured lumber products to build an average single-family home was $16,927 in April 2020, and $48,136 a year later—that’s an increase of 184%.
Higher costs have put home ownership out of reach for 5.5 million Americans, NAHB says, while higher multifamily projects translate into steeper rents for newly built apartments. Builders working with fixed-price contracts are biting their nails over what comes next.
“Of course, affordability challenges for home buyers and renters with modest incomes are even more challenging than these lumber-driven effects imply, as prices for other building materials are also on the rise,” NAHB’s Eye on Housing said.
A convergence of many factors
Rising prices can be attributed to a variety of factors, according to Random Lengths Editor Shawn Church. In a telephone call, Church said everything from labor shortages and restraints in the supply of timber to low mortgage rates and a surge in remodeling have played a part.
“Demand has been driven by various factors going back to last April as the pandemic emerged,” Church said. “When it hit, the industry cut production sharply, anticipating a major setback in demand. But that didn’t really happen. And one reason was that the industry was declared essential and construction was allowed to continue with only a few interruptions in a few cities and regions. The industry cutbacks really overshot what was the true demand. Demand really proved to be resilient.”
Stuck at home because of the pandemic, consumers took their government relief checks along with money they had saved because of their inability to travel and poured it into their homes, he said. The result was an unprecedented run on building materials at home improvement stores. At the same time, many Americans who had been living in cities in order to enjoy short commutes to work suddenly found themselves telecommuting. They realized they didn’t have to live in a city apartment or condo and could instead move to the suburbs where they had more elbow room. That meant more buyers for single-family homes.
The problem was that some mills shut down early in the pandemic had not reopened, while lumber supplies in three out of four major North American growing regions remained tight. In western Canada, Church said, supplies were squeezed by a decades-long infestation of mountain pine beetles (you can read more about that insect problem in this article from The Atlantic). In the Pacific Northwest of the U.S. a lot of timber was on federal land and off-limits to loggers, leaving that region essentially a privately owned timber base. Only in the southern pine region of the southeast U.S. are timber stocks on the rise.
Even the echoes of the Great Recession of 2008 are in play. When that housing bubble burst, the lumber industry tooled its mills to run at a lower level or production, and it just hasn’t managed to catch up.
“Really, on the supply side the industry milling capacity has not risen to an adequate level to meet the level of demand we see today,” Church said. “Demand for housing has really catapulted from a level of a year ago. At the start of 2020 we were at 1.2 million, 1.3 million housing units and we’ve jumped to 1.6 or 1.7 million now. The industry simply doesn’t have the capacity to supply this level of demand.”
Dustin Jalbert, senior economist with Fastmarket RISI, said by telephone that lumber producers last spring looked at unemployment figures and how sectors of the economy were faltering. They thought back to the housing fallout in 2005-2009 and acted accordingly.
“They curtailed and cut production pretty heavily in April and May, thinking that demand would fall, and that never happened,” he said. “Instead, it sort of surged. A lot of wholesalers and distributors sold off their inventory, liquidated. So, the whole supply chain is really, really lean for wood and it’s creating all this chaos and volatility. Basically, demand is the opposite of what everyone thought.”
Builders react to tough conditions
How have builders responded? NAHB took a look at this question last month as it conducted its NAHB/Wells Fargo Housing Market Index survey. The most common reaction, from 47% of those responding, was to include a price escalation clause in sales and construction contracts. Another 29% pre-ordered lumber, and an additional 22% sought lumber price guarantees from their suppliers. Just 13% of the respondents said they were doing nothing.
While builders often were successful in getting suppliers not to bump prices, most guarantees went for less than a month; 57% of price guarantees were for 29 or fewer days. Only 8% of builders reporting that suppliers held prices for as long as three months.
“Neither guaranteeing prices for a month nor any of the other practices cited above completely compensates for the historic surge and volatility in lumber prices the industry has experienced recently,” the NAHB report said. “Price escalation clauses seem to offer some protection for builders, but don’t prevent them from losing sales to customers unable to afford the escalated house prices.”
Pioneer Builders, a spec builder of high-end homes in Washington State, found that buying materials well ahead of when they will be needed has helped. In addition to working with its lumber supplier over the years, the company last year bought enough lumber to build a house and had it delivered on the “off chance” that there would be shortages down the road, said company vice president Bryan Uhler.
“That was a good move as far as lumber prices go, although we didn’t see the possible shortages here,” Uhler said in an email. “Now we’re doing the same thing— buying a house of material ahead of the supply shortages that we may face. As long as fiscal policy remains as it is and the Fed stays on their track, prices will not come down, they will only get worse.”
Uhler said the disciplined business practices of his father, who started the firm in 1978, have helped put Pioneer in a position where advance purchases are possible. In the past, the company has used a fixed-price contract with allowances. At times of high inflation, framing lumber could be one of those allowance items. In general, Uhler suggests that builders communicate clearly with customers about how much materials cost.
“We also maintain a steady pace,” he added, “regardless of what the market is doing. We don’t ramp up when sales are strong. I stay very disciplined on waiting for a house to be complete before listing it. Then I have costs in and make sure they’re covered. If a person has high-interest lending, they can go under very quickly.”
Not all builders are in the position to buy a house worth of lumber and put it away, and homeowners facing quickly rising home costs may be priced out of the market. With those worries in mind, a group of 36 industry groups in March appealed to U.S. Commerce Secretary Gina Raimondo to look into the lumber supply chain, identify the causes for rising prices, and “seek immediate remedies that will increase production.”
Those signing onto the letter included a diverse range of interests, from the American Gas Association and the Independent Electrical Contractors to the Mortgage Bankers Association and the National Housing Trust. They argued that housing could be a bright spot for the economy, but because of increased housing demand and unprecedented activity by DIYers many builders are experiencing lumber shortages and delivery delays.
“Home builders and construction firms that have signed fixed-price contracts are forced to absorb these crippling increases in materials prices and costly delays in deliveries; there is a significant risk that many of these firms will be forced out of business,” the letter said. “To the extent they are able to pass on their additional costs, both single- and multifamily housing becomes less affordable. Other projects will no longer be economically viable, which undercuts the availability of new housing supply and further jeopardizes affordability.”
Some builders change their habits
Higher prices have prompted some builders to rethink the way they build houses. That’s evident in this Q&A thread at GBA launched by a question and comment from Steve Knapp in mid-March.
“Lumber prices are crazy at the moment,” Knapp wrote. “Standard ZIP is around $50 a sheet in some areas. So I was wondering how builders are adjusting. Are you moving to other materials such as glass-fiber sheathing, which seems to be a cheaper alternative to ZIP or exterior plywood?”
The question solicited dozens of replies (58 at last count). Malcolm Taylor, for example, suggested that more builders would start adding bracing to walls and eliminate sheathing altogether. That wouldn’t be permitted in seismic zones, but some production builders already are doing that.
“I’m in the middle of framing two 900-sq.-ft. commercial workshops that rely on let-in bracing and use horizontal strapping for the walls and roofs,” Taylor said. “That is saving about $7000.”
Some suggested insulating concrete forms might start to look more appealing as lumber prices rise, even if foam and concrete have higher environmental price tags.
There also were comments about the possibility of shortages in other areas. Zephyr7, for instance, said the electrical supply house that he deals with is worried about the availability of copper wire this summer. His lumberyard thinks pressure-treated lumber will be in short supply “as everyone spends stimulus money to build decks again.”
“My electrical fabricator is telling me they are having a difficult time sourcing all kinds of parts, and that their steel suppliers won’t hold prices for even 24 hours on quotes—and these are big commercial accounts with decades of history,” Zephyr7 added. “My primary generator supplier quoted me a 15-week lead time for a 150-kW unit about two weeks ago, and as of yesterday, that is now a 20-week lead time. Many residential generators are back ordered through this fall.”
And then there was this comment from Kye Ford: “I have solved the crazy increase in lumber prices by not building. There is only so much I can pass onto a future homeowner, and most of the price increases will have to come out of my bottom line. It’s too risky to build specs right now.”
Where will it end?
Uhler, like Church, has seen ups and downs in the market before. “We’ve also been in business since 1978,” Uhler wrote, “so we’ve been through the booms and busts. The boom always leads to a bust.”
That may be the case, but Church doesn’t see anything in the immediate future that’s going to change the upward pressure on lumber prices. Although he’s clear that Random Lengths is not in the prognostication business, interest rates are at historically low levels and nothing in the economy appoints to a slackening of demand for housing and lumber.
“The only thing I know is that in 30 years of covering these markets is that they do come down,” he said. “It’s usually a number of things that incrementally change the supply-demand balance and these record runs we’ve seen over the years they do tip over the top and prices do come down. This has been an unprecedented run but I have no doubt it’s going to come down. It always does. What goes up will come down. But nobody has the crystal ball to say when.”
Lumber production in the Southeast is a bright spot, and Jalbert thinks that softwood coming in from central Europe and parts of Scandinavia will help relieve some supply shortfalls. But over the short term, the market fundamentals that have driven up prices are not likely to change dramatically.
“My best guess right now is that in the next few months we are going to see prices continue to rise,” he said. “I do think when you get into the latter part of summer and into fall, seasonal demand will start to trickle down, and buying by distributors will slow down. That will be the beginning of a price correction. But I don’t think we’re coming back to $300 or $400 per 1000 board feet, at least not in the next year or two.”
Scott Gibson is a contributing writer at Green Building Advisor and Fine Homebuilding magazine.