Lumber and plywood are a commodity, and while building material prices always fluctuate, the volatility has been heightened over the past year. The pandemic led to a “perfect storm” of factors including mill and manufacturing closures, labor shortages, housing scarcity, decreased inventory in the distribution chain, transportation challenges and increased demand from homeowners. The industry has always been prepared for one or two of these conditions on any given year, but the unusual combination in 2021 of all factors at once has sent prices soaring.
The latest Random Lengths Report, a weekly publication that tracks national building material prices, shows the price of framing lumber near $1,200 per thousand board feet — up nearly 250% since April 2020, when the price was roughly $350 per thousand board feet. A lumber market that has tripled over the past 12 months has caused the price of an average new single-family home to increase by $35,872, according to new analysis by the National Association of Homebuilders (NAHB) Economics team.
Manufacturing and demand are mostly responsible for the unprecedented lumber price, according to the NAHB April 2021 report, citing that the hikes are attributable to the following factors:
- Many mills reduced production last spring due to stay-at-home orders and social distancing measures enacted by state and local governments at the onset of the coronavirus pandemic.
- When it became clear in the ensuing months that housing weathered the storm much better than predicted and demand remained strong, lumber mills did not ramp up production accordingly.
- Supply issues continue to materialize with components that go into the production of manufactured wood products like plywood and OSB. These resin shortages over the last couple of months have affected some OSB plants and LVL production. Phenol, one of the primary components in plywood resins, is in particularly short supply.
- Moreover, producers did not anticipate the massive uptick in demand from do-it-yourselfers and big box retailers during the pandemic.
- Finally, the extreme lumber price volatility has been exacerbated by tariffs on Canadian lumber imports into the U.S. market.
What does this mean for homebuilders?
The NAHB recently asked builders about their reactions to the rising and volatile lumber prices in its April 2021 survey for the NAHB/Wells Fargo Housing Market Index (HMI). On its NAHBNow blog, NAHB shares that nearly half (47%) of single-family builders in the HMI panel indicated that they were including price escalation clauses in their sales contracts as their primary mitigation effort.
How will this affect homeowners?
According to the National Association of Realtors (NAR), few areas of the economy have seen inflation intensify like the U.S. housing market. The median price of a previously occupied U.S. home hit a record-high $329,100 in March of 2021, a whopping 17.2% increase from a year earlier.
Rising building material costs combined with a shortage of available homes for sale across the country is driving demand and contributing to the increase in home prices. According to the NAR, a balanced Real Estate market is considered to include a six-month supply of available housing. The current supply stands at 2.1 months, which is down 28.2% from a year earlier and falls well short of homeowner demand.
The current conditions could be considered positive for homebuilders who are racing to capitalize on the strong demand and increased housing prices. However, inflation, supply shortages, labor shortages and market volatility are detrimental long term factors that homebuilders and suppliers in the industry hope will be corrected in the near future.