How Coronatarians Caused Lumber Prices to Skyrocket

As the [insane response to the] pandemic crushed the US economy last spring, sawmills shut down lumber production to brace for a housing slump. The slump never arrived and now there isn’t enough lumber to feed the red-hot housing market.

The shortage is delaying construction of badly needed new homes, complicating renovations of existing ones and causing sticker shock for buyers in what was already a scorching market.

Random-length lumber futures hit a record high of $1,615 on Tuesday, a staggering sevenfold gain from the low in early April 2020. That’s a big deal because lumber is the most substantial supply that home builders buy.

“I’ve never seen anything quite like this,” said Brant Chesson, the president and CEO of Homes By Dickerson, a Raleigh, North Carolina-based home builder.

Chesson said his company would love to build more homes to meet surging demand but currently it can’t find the materials, or labor, to do so.

“It’s absolutely contributing to a shortage of housing,” he said.

‘This can only last for so long’

And because the housing market is on fire, the lumber shortage is costing many prospective home buyers even more money.

Surging lumber prices alone have pushed the price of an average new single-family home $35,872 higher, according to an analysis by the National Association of Home Builders.

“While lumber prices have gone up, we have been able to pass it on to the consumer with higher prices for homes,” Jeffrey Mezger, the CEO of KB Home (KBH), told CNN Business. “And there is still far more demand than there is supply.”

But builders can’t jack up prices forever.

“This can only last for so long before affordability becomes pinched and demand pauses,” John Lovallo, lead home builders analyst at Bank of America, said in an email.

The median sale price of existing homes surged by a record 17.2% in March to $329,100 — the highest since the National Association of Realtors began tracking prices in 1999.

Lumber is so hot, it’s being stolen

Independent builders, which lack the scale advantages of large construction companies like KB Home, are already feeling the pain.

Tom McCarthy can’t finish building a home in Bergen County, New Jersey because of the lumber shortage.

“There are pieces of wood that we can’t find,” said McCarthy, a real estate broker with the Chen Agency who also builds homes with his father on the side.

McCarthy estimates the cost of lumber for the home will hit $70,000, nearly double the cost of building the exact same home in a nearby town just eight months ago.

Some renters are also paying the price. The NAHB estimates that the lumber price spike has added nearly $12,000 to the market value of an average newly built multifamily home — translating to households paying an extra $119 per month to rent a new apartment.

The shortage — and price boom — is so extreme that builders report having lumber and other raw materials stolen from their construction sites.

“Theft has been huge in our market. We have tens if not hundreds of thousands of dollars stolen during the year,” said Chesson, the North Carolina builder.

Saw mills can’t keep up with demand

Today’s shortage has roots in the previous housing boom. New home construction crashed after the housing bubble popped in the mid-2000s. That made sense because the market was badly oversupplied. But the downturn also drove countless sawmills out of business, leaving the industry unprepared for today’s surge in demand.

And then Covid happened. Sawmills eased output last spring in anticipation of another bust and as they grappled with heath restrictions.

“There was a great fear among sawmills to prepare for a downturn. When home buying surged, they could not open up capacity quickly enough,” said Lawrence Yun, chief economist of the National Association of Realtors.

At the same time, demand for lumber is also being driven by a surge of renovations and expansions of existing homes.

But contractors are having trouble finding and paying for lumber, creating another headache for consumers.

“It’s a cost that our members can no longer shoulder the burden on,” said David Pekel, CEO of the National Association of the Remodeling Industry. “They have to pass the cost on to the homeowner.”

Source: CNN Business

When the pandemic hit in the spring of 2020, many people in the lumber industry assumed business was about to go sour. Millions of people were out of work, businesses across the country were shuttered, and the country was in a recession. And so, producers reacted accordingly.

“They really dialed back, thinking that demand would fall, and the reality is that demand never slowed,” said Dustin Jalbert, senior economist and lumber industry specialist at Fastmarkets RISI.

Instead, things sped up. People stuck at home because of Covid-19 shutdowns across the country decided it was a good time to take on home improvement projects repairing and remodeling their homes — they put up fences, added on decks, built out offices, refinished basements. The DIY trend helped drive stellar sales numbers at stores such as Home Depot and Lowe’s.

Many of those who weren’t busy fixing up their homes went looking for new ones. And where they couldn’t find preexisting homes, they started to build. Whatever initial slowdown there may have been in construction pretty quickly subsided. “Us being capitalist America, if people want to buy a house because they want to move out of the city and move to the suburbs, someone will build it for them. They’ll figure out a way,” said Michael Wisnefski, CEO of MaterialsXchange, an online marketplace for lumber and plywood.

Source: Vox