The costs of sawn timber are skyrocketing and driving up housing prices
The cost of sawn timber goes through the roof, and that hits the housing industry on all fronts. For building owners, renovation companies and do-it-yourselfers, the costs of projects are now much higher than they were a year ago and are about to move into historical areas.
Softwood prices are now 112% higher than a year ago and, according to Random Lengths, up 10% over the past week.
The demand for single-family homes, largely caused by the coronavirus pandemic, is increasing 30% year over year, according to the U.S. Census. That is part of the problem on the demand side. There has also been an increase in home remodeling as people sit at home longer and invest money they would have spent going out or traveling to their homes and properties.
Low interest rates also affect sawn timber prices, fuel demand for housing and give builders more incentives to increase production.
“It’s also worth noting that durable goods continue to increase as individuals purchase large appliances and furniture. This also helps increase lumber prices as many of these items are shipped on wooden pallets,” said Joe Sanderson, director of natural resources at Domain Timber Advisors , an Atlanta-based Timberland Investment Management Organization.
But it’s not just demand that drives prices so high. The offer is completely wrong, as both mill operators and timber traders misinterpret the 2020 market. Since construction starts and renovations were weaker in 2019, production was stopped. The expectation was that 2020 would be similar.
“Covid hits and you get really, really scared. You have consistently seen building restrictions,” said Paul Jannke, principal at Forest Economic Advisors.
Then came the completely unexpected boom. Housing emerged as one of the brightest spots in the economic recovery, and demand quickly returned.
The problem was that the pandemic also made production difficult. Some mills have had to limit shift work to comply with social distancing rules.
In addition, timber traders didn’t exactly believe that demand would remain as strong as it did after last summer, Jannke said, and dropped their stocks to hit low levels in the fall.
When they saw new demand in January, they went to the mills and the mills didn’t have enough because they just weren’t working at full capacity anymore.
“After a decade of weak home starts, the industry has adjusted production to those weak starting levels, and now demand is so much higher that supply simply doesn’t exist to meet current demand levels.” “Said Jannke.
That drove up prices.
The problem is particularly acute in remodeling, as the pandemic has resulted in so many people looking to add extra space, especially outdoors. Building contractors and design firms are caught in the middle.
“We usually review material costs quarterly and make small adjustments. However, as this is so volatile today, we have to do this every 30 days. We see some sawn timber products increase up to 25% in a month,” said Rick Matus. Senior Vice President at Case Architects and Remodelers in Maryland.
“One of the very popular questions we ask is whether we can build a porch or a deck for a porch. Compared to a screened porch project two summers ago, we’re probably 15% or 20% more expensive.”
Matus says most people don’t walk away from projects, they just re-imagine them. And for those who want to get it done quickly, that’s next to impossible.
All of this has also affected the mood among builders, which was at a record high a few months ago. Higher lumber prices have increased the price of an average new home by more than $ 16,000, according to the National Association of Home Builders. Some estimate that the additional cost is even higher.
However, builders can only pass on as much of their costs as buyers can afford. Higher costs will certainly hurt builders’ profitability and margins. The mood among builders was at a record high just a few months ago, but higher material prices have recently led to a decline. There are now isolated indications that some builders are laying foundations but are pausing because the framework costs are so high.
“While housing construction continues to help drive the economy, limited inventory is hindering more robust growth,” said NAHB chief economist Robert Dietz. “A lack of buildable land makes it difficult to meet strong demand, and rising material prices far outweigh rising property prices, making housing less affordable.”
The same applies to the renovation.
“Low interest rates and increased demand for renovations due to the pandemic have given the architecture and design firms confidence in the first quarter compared to the previous quarter,” said Marine Sargsyan, senior economist at Houzz. “Nonetheless, construction companies have eased their expectations slightly as they continue to face supply chain constraints, labor shortages and rising costs for materials like sawn timber.”