Lumber has become a sizzling hot commodity during the pandemic, and when commodities sizzle, so does the price tag. The cost of lumber has shot sky high since April, and that’s adding thousands on to the cost of new homes and renovations. For some, it isn’t a matter of price. It’s a matter of whether you can get the lumber you need.
In a report by Fortune, research by Random Lengths shows that lumber prices have soared 134% year-over-year due to a lumber shortage and high demand. (1) Some of that shortage has been due to sawmill shutdowns during state lockdowns to address the pandemic. That halted the amount off lumber being pumped into the pipeline, but there’s also been a surge in demand for single-family homes after lockdowns were lifted. Homeowners have also been doing a lot off renovations while they’ve been stuck at home, and that’s taking a bite out of the lumber supply.
Severe Lumber Shortage
Senior economist at Fastmarkets RISI, Dustin Jalbert, doesn’t expect it to get any better in the months ahead. He told Fortune, “This is a severe lumber shortage… Demand is hot and continues to be strong. In the next month or two, it’s going to continue to be elevated.”
He also says the lumber crunch was unexpected because the industry assumed that the pandemic would result in a housing slump, or maybe even a crash. But that hasn’t happened. Lockdowns postponed the traditional spring home-buying season, but once they were lifted, the entire industry relaunched.
We’re now seeing some of the best home sale activity since 2006. The latest report from the Census Bureau says the sale of new single-family homes rose 14% between June and July. If you compare that to the same time period last year, they are up a whopping 36%.
Strong Demand for New Homes
Some of the activity is coming from back-log of homebuyer plans that were delayed because of lockdowns. And with a limited supply of existing homes, there are more people going after new homes. Demand has also been amplified by a new desire to move to less expensive locations or larger homes with outdoor space instead of apartments. Combine all that with ultra low interest rates we’re seeing right now, a new wave of millennial first-time home buyers, and stock market gains that might help with down payments, and you’ve got a lot of motivated home buyers.
The median price for a new home in July was $330,600 which is about $22,000 dollars more than it was in July of 2019. The National Association of Homebuilders is estimating that higher lumber costs account for about $14,000 of the additional cost. The Association’s chief economist, Robert Dietz, says that for every $1,000 of extra costs for a home, there are 150,000 families who can’t afford to buy one. (2)
Trade Dispute Impact
Lumber prices have also been impacted by trade disputes between the U.S. and Canada. Back in 2017, President Trump accused the Canadian lumber industry of unfair government subsidies which make Canadian lumber inexpensive on the U.S. marketplace. The Canadian government and lumber industry officials denied that was the case, but the Trump administration imposed a 20% tariff to level the playing field.
Canada has gone to the World Trade Organization several times in connection with the dispute. The WTO just issued a decision in the most recent case saying that Canadian lumber was not being improperly subsidized. According to a report in the New York Times, Canada expects that U.S. tariffs will be lifted as a result of the decision but that’s probably not going to happen anytime soon. President Trump doesn’t have a high opinion of the WTO which he has described as a “broken” and “horrible” institution. (3)
In the meantime, builders are dealing with price spikes for lumber that may force them to renegotiate contracts. For buyers that can’t afford the additional cost, they may have to cut back on more expensive finishings like countertops and flooring, or maybe reduce the size of the home.
What does this mean for real estate investors? Higher material costs are passed on to the price of the home. This means new home prices will likely increase. So if you can buy a new home at today’s prices, you can collect cash flow on the rents today, and probably expect some appreciation on the property value as well. We are offering a free webinar series on what you need to know about buying new homes, especially when buying out of state and in some cases, sight unseen. Just visit newsforinvestors.com and click on the learn tab. If you are already a member of RealWealth, you will receive an email invite for this. And there’s a new feature on the RealWealth site for logged in members – a brand new home will be featured each day on the website. Check it out at newsforinvestors.com.
(1) Fortune Article
(2) NAHB Now Article