Lumber – It has been the word in construction this year that we simultaneously hate talking about and can’t stop talking about. At this point, anyone who has speculated on what’s going to happen with pricing has been wrong at least once. While no one can predict what’s going to happen, there may be some answers to find by looking at how we ended up here.
First, let’s assess the current state of lumber. This information is taken from pricing and supply from several large providers we work with across multiple states:
- The commodity index has been posting new record highs nearly every day so far this month (NASDAQ: LBS), until mid-week this week. The pace is the most startling thing here – On April 8th it passed 1100 for the first time in history then, only 7 market days later on April 19th it passed an astonishing 1300.
- Futures are very close to current price levels, which suggests that there’s no expectation of prices coming down anytime soon.
- OSB is in its own category. It’s selling for $2,000 per 1,000 board-feet – This is over double what it was about 6 months ago. As of this writing, we are being quoted $68 per sheet of 5/8″ OSB – And that’s only if it can be located and sourced.
- Engineered lumber is becoming non-existent. The lumber shortage coupled with resin shortages has had some lumber suppliers saying they can’t get materials like LSLs and have no idea when they’ll be able to again.
- Interestingly, the lead time on dimensional lumber is dropping, with 2x boards available in as soon as 4 weeks again. Yet, the price continues to climb. So if supply is no longer a price driver here, then what we’re seeing now is entirely demand-driven.
So how did things get so bad? The answers tie back, believe it or not, to issues in 2006 relating to the single-family home market:
- In 2006 a new record of housing starts of 2494 units. This was a slow build-up from the early 1990s when it hit a major low with the 1990 recession (US Housing Starts)
- As we all know, that bubble burst and starts dropped to a record low in 2008. During this time, a number of US mills closed due to the severe drop in demand.
- As starts began to steadily climb after that recession, the mills increased production – Lumber held steady for most of the 2010s, with the exception of a spike in 2018.
- The fragility of this steady increase was tested when COVID-19 hit, and production stopped. Multiple things happened here:
- Continued effects of QE left us with record-low mortgage rates and an emphasis on homes due to lockdowns spiked an unprecedented shift in demand for single-family residences.
- Low inventory of existing homes plus the slowdown in commercial construction meant the demand and need to build these homes for both the construction industry and the consumer base was there.
- What was left was a run-up on demand for single-family homes that the mills didn’t see coming, coupled with their low inventory due to the impacts of the pandemic.
So what happens next? It does set up an interesting situation – That material increases can (and will) eventually cause a self-inflicted slowdown in construction, which in turn lowers prices. There are already hints of this happening. Projects will be tabled or canceled because they can’t sustain the higher prices, lowering construction starts and decreasing demand across the board. The economic issue here is the conflict created with the consumer demand for new housing, but unless there are outside events that curb this demand, this collision is inevitable. Likely the only change that would cause this situation to exist is an end to federal relief packages. This will generate two situations:
- End-users won’t be able to keep bearing the brunt of these increased costs in higher rents/prices.
- Delayed evictions and foreclosures will create an inventory that is more available and cost-effective than new construction.
Join us in continuing to watch the single-family market for indications on when we might see relief in lumber prices. In the meantime, be aware of these pricing and material shortage challenges in planning any projects involving wood-framing. We have found ways to creatively secure material and in some cases, substitute for alternate framing methods to avoid issues. Let us all hope, but not hold our breath, for lumber costs to come off in the future – Someday.
Director of Preconstruction Services
The Douglas Company
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