How did the spike in wood prices increase house costs?

Sawmills in the United States and the world closed last March in response to the COVID-19 pandemic. Today, the economy is climbing back, but the aftershocks of last spring are hitting harder than ever.

At the end of April, timber prices were up 67% from the beginning of the year and a whopping 340% higher than a year ago, according to Random Lengths, a timber products tracking company.

With home buyer demand peaking, real estate markets across the country are in dire need of new construction. But if wood remains as expensive as it is, there is a real barrier to building houses.

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Lumber adds nearly $36,000 in home expenses

This time last year, the average wood cost was about $350 per thousand plank feet. Today, that number stands at about $1,200 per thousand board feet.

The high price has pushed house prices even higher. The National Association of Home Builders (NAHB) estimates that the cost of wood over the past 12 months has added an additional $35,872 to the price tag of an average new single-family home.

This comes amid a market yearning for more offers. New homes account for a quarter of active ads, which is the highest market share ever. But that’s not because enough new homes are being built. Instead, it is due to a significantly low stock of existing homes. For context, new construction usually takes up about a tenth of the total inventory.

Because demand was so high, house prices would naturally rise. Tackle the high wood costs and prices skyrocket. This is of course a problem, as higher prices exclude many potential buyers, such as millennials and lower-income families.

It doesn’t stop at the market either. For example, multi-family homes have increased in price by an average of $13,000. This has added an additional $119 to the monthly rent, adding to the affordability issues.

The pressure on builders

Sticker prices are rising at every level of real estate, but builders pay the bill the earliest. Builders across the country no longer have access to wholesale lumber because the supply simply isn’t there.

Mills that closed last year are lagging behind. In fact, timber is in such high demand that there have been reports of theft from construction sites.

“Theft is huge in our market. We stole tens, if not hundreds of thousands of dollars over the year,” said Brant Chesson, the president and CEO of Homes By Dickerson in Raleigh, North Carolina.

On the other side of North Carolina, in Asheville, Matt Stephen, owner of Alpha Plus Services, a home construction and renovation company, weighs the difficulty of market prices. “It’s not just wood. All materials go up. Drywall, PVC, electrical wires, everything,” he said. “I lost more bids this year than any other year because I had to pass on material costs to customers. It’s going to be tough.”

For construction crews across America, that’s the reality. Rising costs make it more difficult to secure much-needed business. Many renovation projects are either scaled down or halted altogether once homeowners review their proposals.

The price of drywall is almost 7% higher than last year. Copper prices hit a record high in April and steel rose 18% in March.

Builders are discovering that the total cost of building a new home is now double what it was a year ago.

What is the solution?

Many are pointing the finger at politics and calling on the Biden administration to take action. Labor shortages are more pronounced as the economy recovers rapidly, leaving many industries lagging behind in their supply chains.

On the real estate side, the timber shortage has roots dating back to tariffs introduced in 2017. Then timber tariffs on Canada were slammed at a rate of 24%. They have been reduced to 9% since the end of last year, but some have called for a complete abolition of the tariff or a temporary suspension.

NAHB chairman Chuck Fowke is in favor of suspending the rate in an effort to reduce price volatility.

“These price increases for wood are clearly unsustainable,” says Fowke. “Policy makers need to examine the timber supply chain, identify the causes of high prices and supply constraints, and seek immediate solutions that will increase production.”

While there has been no official response from the White House regarding the timber situation, there are signs that prices could bounce back to Earth in the near future.

Jeffrey Mezger, CEO of KB Home, believes we are through it. “The mills are coming back online. I think we are past the worst in terms of supply availability.”

Others in the industry believe that timber prices could fall sharply within the next 18 months.

While it’s promising to know the chaos is coming to an end, 18 months is a long time. Investors should monitor developments between now and then and pay attention to the specifics of any government response.

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