Until more lumber mills reopen, expect prices to remain high in 2021
It was spring of 2020, and Keta Kosman saw a perfect storm about to collide with the lumber industry.
As the COVID-19 epidemic set in, then-president Donald Trump and Canadian Prime Minister Justin Trudeau assured business leaders that, despite border closings, trade would not be impacted. The rail cars that carried lumber from the mills of Canada into the lumber yards and big box stores of America would continue to run unabated.
It proved overly optimistic. For safety reasons, lumber mills across the two countries closed down almost immediately. Supply lines choked just as demand spiked to levels never seen before. And the virus was raging.
“Suddenly, the supply chain was seriously impacted by the social-distancing restrictions put in place for health and safety reasons, especially in Canada,” said Kosman, the publisher of trade Madison’s Lumber Reporter in Vancouver. “Fast forward to 2021, and scheduling delivery times in America are still extremely challenging, which is causing a lot of consternation. Since customers are only ordering the wood they need for actual building projects, the added shipment delays are a real problem.”
Home construction in the United States is heavily reliant on trade with Canada, which has historically supplied more than 80% of the lumber imports to the United States.
Supply chain woes and heightened demand forced lumber buyers, builders and mills to spend hours on the phone to try to confirm orders, often to no avail. With paltry supply, customers had no choice but to pay through the nose for materials. This triggered suppliers of other building materials – gypsum, aluminum, copper – to raise their prices, too.
“Industry players were caught by surprise during the usual building and selling season of summer,” Kosman said. “Despite not liking the asking prices, they had to pay because their projects needed to be completed.”
This is the story of how a pandemic in 2020 tested the operational limits of building suppliers, the patience of homebuilders and contractors, and the wallets of their clients. HousingWire also looks ahead to 2021, which is already showing signs of a rebound.
A demand catastrophe
In some ways it’s ironic. Suppliers had actually anticipated a drop in demand when the virus started to spread last spring, with many cutting plywood production – some, in Idaho for instance, by as much as 40%.
But stay-at-home orders evolved into work-from-home orders, and before too long, much of the American workforce was at home all day, every day. Home projects spiked as people pined for a more comfortable living area, and some began erecting second living spaces for privacy while they worked. Demand for lumber began rising.
Then, mortgage rates plummeted to historic-lows, and casual home shoppers became homeowners. Prices on vacant, new, and unbuilt homes were already trending upwards due to the low supply of lumber, but this didn’t stop demand.
“As people started nesting in response to the pandemic, they started undertaking all sorts of home renovation projects,” said Robert Dietz, National Association of Home Builders‘ chief economist. “At the same time, sawmills started shutting down and have only partially reopened because of social distancing concerns.”
Suddenly, lumber suppliers who earlier requested less inventory were beset upon for supply – with little chance of filling the surging order demands in a timely manner.
Lumber and the chain reaction
The NAHB reported that, from April 2020 to August 2020, the price of lumber increased by 110% and hit an all-time high of $950 per thousand boards in September. With these prices, a new home build could suddenly cost an additional $15,000 compared to pre-pandemic numbers.
It’s an effect of the virus – and subsequent low supply – that struck the very lifeline of homebuilding: What do builders and construction companies do when they can’t afford lumber and other materials necessary to put up a new home? Projects creep to a halt, and crews become smaller as companies try to pinch pennies without sacrificing building integrity.
And all the while, prices continue to climb, according to David Logan, director of tax, trade and policy analysis for the NAHB.
“We’re still in record-shattering territory when it comes to prices,” Logan said. “Not just lumber, but oriented strand boards, too, which is a common substitute for plywood. So, you have these two structural parts of a home that are up, percentage terms, triple digits. It depends on the size of the house, of course, but by no means is it insignificant. And as prices go up, that percentage gets bigger.”
Seeing the demand for lumber, companies manufacturing other important homebuilding materials – aluminum, steel, drywall, and copper, among others – raised their prices, Logan said, up to 25% higher than pre-pandemic levels in some instances.
All of this at a time when buyers are flooding the housing market to take advantage of the record-low mortgage rates, which itself pushed up prices. And with demand as high as it is, Kosman said it is not uncommon for some extra costs on a new build to be paid by the homebuyer or homeowner.
“Homebuilders had signed contracts and needed to deliver by the end date – usually about three months from the time they began – and could not pass those increased costs on to customers,” she said. “So, for new building and renovating that started at the end of the summer of 2020, those higher lumber costs were added into building project costs. In short, when lumber supply is so low while construction activity is so high, it is the end-user — the homeowner or home buyer — who pays those increased costs.”
Skilled laborers began hiking their prices to take advantage of the home demand, as well; plumbers installing pipes in a new build, electricians laying wire, and general contractors could increase their rates while remaining in high demand. As of February 2021, hiring a plumber for a house call could average around $300, sources told HousingWire.
It can all be traced back to lumber prices, which went as high as 140% above 2019 costs, according to Chuck Fowke, NAHB chairman.
“This unprecedented price volatility has added thousands of dollars to the cost of a new home,” Fowke said. “Soaring lumber prices and supply shortages are not only harming home builders and home buyers, but also threatening the housing sector and the economic recovery.”
Hope on the horizon?
As the calendar flips to 2021, builders are asking the million-dollar question: Where is the light at the end of the tunnel?
Signs of life were spotted in the fourth quarter of 2020, when prices dropped to around $560 per thousand boards in November. This followed a yearly trend in the supply cycle of lumber – as the colder months settle in, demand for new construction slows, allowing supply to catch up in time for spring.
That price is still high for the winter, experts said, which doesn’t bode well for the first quarter of 2021.
“Producers of framing lumber are telling us they can’t increase production much to meet these higher prices,” said Stinson Dean, CEO and owner of Deacon Lumber Company. “Log shortages and capacity restraints related to COVID precautions have handcuffed producers at a time they should be investing in as much production as they can.
“Lack of for-sale supply is at generational lows, which can suppress demand. The weirdest part is, it hasn’t yet.”
It is vital that the U.S increases domestic softwood lumber production and obtain a new lumber agreement with Canada, Dietz said. Even with these moves, don’t expect a switch to flip and prices to return to pre-pandemic levels, he said.
“Other supply chain disruptions are also increasing construction times and raising costs,” Dietz said. “Combined with higher regulatory burden risk, housing affordability headwinds will increase in 2021.”
It’s just as important, Fowke said, that domestic lumber mills ramp up production once they re-open.
“In the wake of the COVID-19 pandemic, housing has been one of the few economic bright spots,” Fowke said. “But housing’s potential to lead the economy forward remains limited as long as lumber remains expensive and scarce.”
As is the case for so many suffering businesses, the continued distribution of COVID-19 vaccines and the promised economic stimulus triggered by President Joe Biden’s $1.9 trillion American Rescue Plan will be key in reversing the pricing and distribution trends of lumber and other building materials. Controlling the virus seems to be the first step, as more vaccinated workers means more lumber mills can safely re-open across the country, leading to an uptick in inventory.
Until then, with the vaccine rollout progressing slowly, builders can expect the same low inventory and the same high prices for the time being. (Housing Wire)
“Customers could always choose to simply delay projects in the expectation that prices will go down eventually,” Kosman said. “For 2021, now at the beginning of February, it is clear that lumber prices will not go down.”
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