In a recent post on the National Association of Home Builder's (NAHB's) Eye on Housing blog, chief economist Paul Emrath said rising softwood lumber prices have added $35,872 to the price of an average new single-family home, and $12,966 to the market value of an average new multifamily home.
The price increases affect any softwood used in structural framing, sheathing, flooring and underlayment, interior wall and ceiling finishing, cabinets, doors, windows, roofing, siding, soffit and fascia, and exterior features such as garages, porches, decks, railing, fences, and landscape walls. Products include not just dimensional lumber, by plywood, OSB, particle and fiberboard, shakes and shingles.
Emrath quotes prices from data tracker Random Lengths that, as of April 17, 2020, the total cost to a builder for all the lumber and manufactured lumber products described above was $16,927 for the products in an average single-family home, and $5,940 for the products in an average multifamily home. By April 23, 2021, the fully phased-in costs have risen to $48,136 for the softwood lumber products in an average single-family, and $17,220 for the products in an average multifamily, home. These estimates represent a 184 percent and 190 percent increase in single-family and multifamily builders' lumber costs, respectively, over the past year and translates to a rent increase of $119 per month for a new apartment.
Emrath says the increase in the average new home price has priced more than 5.5 million U.S. households out of the market, meaning that these households could qualify for a mortgage to buy the average new home before the price increase, but not afterwards.
Wells Fargo is attempting to explain these increases and their bottom line is that it won't improve any time soon. The company's weekly Real Estate and Housing Commentary says lumber futures contracts for May delivery were priced at $1,645 per 1,000 board feet, up about 60 percent from one month ago and 374 percent over the past year. This is the fastest surge in lumber prices since the housing boom that followed World War II. Yet, home starts today are far from historic levels and the report places much of the blame on a sharp supply-demand imbalance caused by the pandemic.
At the pandemic's onset, sawmills shut down or vastly reduced operations as states and provinces imposed operating restrictions and social distancing mandates. Demand, however, didn't behave accordingly. Fueled by the pandemic's new work-and-learn-at-home lifestyle, home sales and remodeling surged. More people were moving to the suburbs and rapidly-growing metro areas in the South and Mountain West and with few existing homes for sale, prospective buyers turned to the new home market.
Home building continued in many locations, was shut down only briefly in others, and emerged from the lockdowns largely unscathed. The lumber industry, however, has been slow to reopen, particularly in the Pacific Northwest and Canada.
The U.S. forest products industry was short of capacity even prior to the pandemic, creating increasing dependency on imports. Episodic surges of COVID and continuing vaccination problems have held down production in Central Europe while recent weakness of the dollar relative to the euro and Canadian dollar has also contributed to price increases. Import prices for wood products manufacturers have soared 80 percent over the past year.
Wells Fargo says the short-term future is dim. While some production capacity is back on line, producers are still hampered by COVID operating restrictions, and are struggling to rehire workers. A shortage of truck drivers and higher diesel fuel prices are making it less profitable for timber owners to ship logs to the smaller number of operating sawmills.
Canada, long a major U.S. supplier, has had its own supply issues. Over the past decade, the mountain pine beetle has destroyed an estimated 15 years of lumber supplies in British Columbia, Alberta, and the Pacific Northwest. Initially, the infestation restrained lumber prices as loggers raced to clear affected trees as quickly as they could. That strategy only worked for a couple of years, and the longer dead trees sat the less suitable they were for lumber. In 2017 and 2018, massive wildfires hit the region, inflicting the worst damage on areas not yet hit by the beetle infestation. This was before COVID-related mill restrictions added to the challenges. Production has increased recently, and Canadian lumber imports have picked up. The U.S. Commerce Department reduced tariffs on Canadian lumber to 9 percent from 20 percent in December.
Dwindling supplies of lumber have caused delays, boosted costs, and added an extra level of uncertainty to project budgeting. Wells Fargo says the $36,000 additional cost cited by NAHB was calculated before the most recent spike in prices. "The uncertainty about where lumber prices are headed is causing builders to limit sales in new residential communities. Apartment developers are also delaying projects and looking for alternative materials," the report says.
The company predicts the supply-demand imbalance will eventually remedy itself as operating restrictions are eased, supply chains normalize and mills more fully reopen, but ramping up production to pre-pandemic levels might not be enough. Many sawmills were shuttered in the aftermath of the housing bust in 2008, and fewer new mills have opened over the past decade as homebuilding suffered through a lackluster recovery. On top of that, the Pacific Northwest's extensive timberlands have endured massive wildfires recently. All in all, Wells Fargo says, lumber prices are unlikely to return to pre-pandemic levels this year.
Completely removing the tariffs on softwood lumber imports from Canada might provide some additional relief, but the massive losses of timber from the beetle infestation and wildfires will take decades to replace, and mill operators have shifted their focus to the southern United States.
Wells Fargo's report concludes, "The unprecedented spike in lumber prices poses an enormous challenge for the construction industry. In addition to ascending lumber costs, builders are having to contend with rising prices for many other materials, including copper, steel, household appliances and cabinets. Supply shortages should ease somewhat later this year, as COVID risks recede further and more sawmills reopen in the Pacific Northwest. Imports from Central Europe and Scandinavia are helping make up part of the shortfall, but a weaker dollar makes those imports more expensive. A quick resolution to the industry's supply woes by building new sawmills is unlikely, however, as construction of a new plant is a capital-intensive process that often takes years."