The Lumber Market Is Cooling. But Will It Last?

A few months ago, we reported that lumber prices had reached all-time highs, adding a mind-boggling $36,000 to the cost of homes.

But after a year of elevated prices and shortages, the lumber market is finally returning to Earth. Prices have dropped 65% from May, now totaling around $600 per thousand board feet.

While still nearly double the cost of pre-pandemic levels, lumber output is finally catching up to demand.

When will price decreases reach the consumer?

The lumber market works on a lagging schedule. Prices are starting to fall on the production side, but consumers won’t feel the immediate effects of lower price points until mills sell off their older, higher-priced boards first.

This means that builders will still face higher costs when starting projects, extending the timeline for all of the new construction homes, which are desperately needed to alleviate the extreme shortage of properties on the market.

The housing shortage is nothing new. A report from the National Association of Realtors (NAR) in June found that the “underbuilding gap” since 2001 has grown to roughly 5.5 to 6.8 million units.

“There is a strong desire for homeownership across this country, but the lack of supply is preventing too many Americans from achieving that dream,” said Lawrence Yun, NAR’s chief economist. “It’s clear from the findings of this report and from the conditions we’ve observed in the market over the past few years that we’ll need to do something dramatic to close this gap.”

The nature of the lumber market over the past year has not made this any better. However, a breakthrough in the inventory crisis shows signs that buyer demand is starting to taper off—at least for now. The Census Bureau reported that June’s month-on-month home sales fell 6.6% from May and a large decrease of 19.4% from June 2020.

Building applications also fell in June, despite lumber costs starting to dip.

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But will prices keep falling?

There’s speculation that the current lumber price doesn’t reflect actual market demand. Aberdeen Standard Investments strategist Robert Minter told Markets Insider last week that lumber “looks a little cheap” at the moment.

This comes as prices have rebounded to above $600 at the beginning of August. July posted figures around $550 per thousand board feet.

Minter says that there is “demand that has yet to hit,” stating that “people are moving from where they had to live to work to where they want to live. All the people that want to move out of the city center and the near suburbs to someplace cheaper, those people have not all moved.”

Tack on labor shortages and the possibility of the COVID-19 Delta variant resuming previous restrictions on the economy and it’s not safe to assume the labor market is out of the woods yet.

The National Association of Home Builders (NAHB) shares the same concerns. In a press release last month, the NAHB noted that sawmill output continues to lag, and if supply doesn’t scramble to meet demand, we might find ourselves facing the same dilemma as last November. Back then, the lumber market enjoyed a reduction in prices, only to shoot right back up again to record highs.

Construction costs don’t stop at lumber

While most attention has gone towards framing lumber, many have forgotten to examine other pieces of construction costs, some of which are still hitting record highs in cost.

For example, oriented-strand board (OSB) prices have grown 510% since January 2020 without any signs of calming down. It’s surprising that attention hasn’t been given to OSB, considering it accounted for nearly two-thirds of wood panel wall and roof sheathing in 2019.

It doesn’t end there. Copper prices are still near record-high prices, making electrical and wiring projects just as expensive as they were when lumber was maxing out. Plus, labor costs are growing in an economy desperate for workers. The Associated General Contractors of America reported earlier in the year that construction wages had grown about 3.2% from 2020, up to a little over $30 per hour.

With all of these mounting costs, the outlook for new construction is hard to predict. However, as long as some costs are easing, it’s welcome news for most.

For real estate investors, getting the most bang for buck is an essential element of success. Unfortunately, in an economy where everything is getting more expensive, finding deals becomes a lot harder.

It’s important that we continue to pay attention to the lumber market, as it will continue to paint a picture of the impact COVID-19 has had on our economy and local markets.

2021-08-11 17:30:00

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