Soaring Lumber Prices Pose Threat To Homebuilding, While Housing Inventory Keeps Narrowing

Surging lumber prices have put a serious crimp in the U.S. homebuilding industry which has seen rising sales, climbing prices, but ever-tightening inventory.

According to the National Association of Home Builders, or NAHB, lumber prices have skyrocketed by more than 130% since mid-April, adding about $16,000 to the cost of a new average single-family home.

“As people started nesting in response to the pandemic, they started undertaking all sorts of home renovation projects,” said Robert Dietz, chief economist for NAHB. “At the same time, sawmills started shutting down and have only partially reopened because of social distancing concerns.”

"Growing demand for lumber met insufficient supply, and the result has been escalating prices," he said

Dietz also noted the lumber industry has lost 6,000 jobs since the pandemic began and has recovered only about half of them.

In August alone, lumber prices jumped by 14.9%.

“Such a sharp increase has put unnecessary pressure on homeowners and builders alike to figure out how to close the gap,” NAHB said.

Randy Noel, a custom homebuilder from LaPlace, Louisiana, and former NAHB Chairman, said he received a lumber quote for more than $28,000 earlier in September – double what he had paid for the same amount of lumber in another project in February 2019.

“I know builders who have had to call customers and give them their deposit back and say, ‘I can’t build your house because of the price of lumber,'” Noel said. “People already have their loan secured and can’t increase the price.”

Cynthia Walsh, CEO of the Brunswick County Association of Realtors in North Carolina, is concerned about the impact of rising lumber prices on housing costs.

“We are seeing [that] these new homes could potentially jump up in price,” she told WilmingtonBiz. “And I’m not talking about… just the giant new homes. I’m talking about the affordable homes, too.”

Jeff Klearman, portfolio manager at GraniteShares, a New York-based exchange-traded fund provider, told International Business Times that lumber prices have been rising primarily due to increased housing demand which has resulted in increased lumber demand.

“Demand for new homes has strongly increased due to a number of factors, including COVID-19 related relocation from urban to suburban areas, historically low mortgage rates and existing low inventory levels of new homes,” he said. “Demand for lumber also increased as result of damage due to recent hurricane-related weather and wildfires along the west coast.”

Reduced lumber supply has also affected prices. “With the onset of the pandemic, mills reduced production in anticipation of reduced demand resulting in depleted lumber supplies,” he explained.

Klearman noted that typically, higher commodity prices spur greater production, which, at some point, alleviates that commodity shortage.

“To the extent lumber mills can increase production from coronavirus-related low levels, additional lumber and home price increases may be muted,” he said. “In addition, housing demand may be reduced as housing prices increase.”

The U.S. imports about one-third of its lumber from Canada. However, in early 2017 the Trump administration imposed tariffs on those goods.

Noel suggests that one way to alleviate the lumber shortage would be to remove these tariffs.

“If lumber mills are struggling to keep up, [Commerce] Secretary [Wilbur] Ross can remove tariffs temporarily to keep lumber prices from skyrocketing,” he said.

Dietz of NAHB recently told the Wilmington-Cape Fear Home Builders Association in North Carolina: “There’s still an effective 20% tariff on Canadian softwood lumber. I think from a policy perspective, we need to temporarily suspend those lumber tariffs and get a new softwood lumber agreement with Canada . . . and then encourage and facilitate the domestic [lumber] industry to produce more.”

Softwood is the type of lumber most commonly used in house construction.

But Klearman is not convinced that reducing or removing tariffs on Canadian lumber would necessarily be helpful at this time.

“New home prices in Canada have also strongly increased for many of the same reasons as in the U.S.,” he pointed out.

Meanwhile, home sales and home prices in the U.S. are both surging.

New home sales rose by 3% from July to August. The median price of an existing home sold in August soared to a record high of $310,600 -- up 11.4% from the prior year.