The cost of building or improving a home since the start of the pandemic has skyrocketed due to rising lumber prices, but lumber prices are showing signs of slowing. Futures contracts fell to $ 536 per thousand board feet of lumber as of July 16, down 68% from the record $ 1,670.50 on May 7, according to the Wall Street Journal.
When states across the country began issuing stay-at-home orders in March 2020, many industry professionals were unsure how long the pandemic would last or whether the economy would go into recession. US lumber companies have started cutting back on production so they don’t end up with oversupply with weak demand. It was one of the few causes that contributed to high lumber prices, according to Tim Morris, associate broker at HomeSmart and former home builder.
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“The most important factor is really raising prices because they can. There is more demand than supply, ”comments Morris. He adds that another issue that affected the supply concerned the United States’ neighbor to the north. The Canadian lumber industry is subsidized by the government, which means that Canadian companies can sell their product for less than their American competitors. In retaliation, the U.S. government instituted anti-dumping rules that impose tariffs on Canadian lumber as it crosses the border, demotivating trade between the two countries, although this still happens.
“Because Canada had a stricter approach to COVID-19, many loggers returned home and were paid more than they would by risking their lives cutting down trees in the wild,” Morris said, “So the Canadian supply evaporated, then the demand went crazy.”
With many Americans stuck inside, home improvements have become an attractive way to pass the time.
“The volume of lumber purchased from Home Depot was above the cap until about a month ago. Suddenly, a piece of plywood cost $ 100, down from $ 17 in April 2020, ”Morris continues.
FUTURE TIMBER PRICES
Like many other commodities, such as corn or wheat, lumber is bought and sold with forward contracts.
“The wood that will be produced next March is already sold to someone on a futures contract. Some investors buy it in the hope of getting a slight upside, ”Morris explains.
Home builders usually get the lumber price from a framing contractor, who got the information from a lumber yard, who priced a car of product on the basis of a contract intermediary with the holders of futures contracts.
Tom Nun, owner of Horizon Commercial Contracting, has seen his business affected by price uncertainty. “Our clients need to have a clear idea of their costs to be able to calculate their return on investment and see if a project makes sense. With prices moving, it’s a tightrope to walk because we have limits on the part of the lumber suppliers on how long they are willing to maintain the price they are floating, ”says- he.
According to Morris, sharp fluctuations in costs affect profitability. “In April 2020, I was building at Casa Grande and I was paying $ 31,718 for the frame. Today that same job costs $ 80,357. And there have been three-month periods where prices have hovered as high as $ 25,000. It is more than the entire margin of the house.
Nun says he has heard from subcontractors that they are getting five-day quotes for plywood and oriented strand board (OSB). “It becomes difficult for me to provide an estimate to one of my clients to make a decision. Then I have to contract and order the product within five days. It becomes difficult for anyone to meet these kinds of deadlines, ”he notes.
Wood prices have started to fall, but it will take time for the end user to realize these savings. “It’s like gasoline at the pump,” Morris explains. “People hear about a ruptured pipeline and gas at the pump goes up by 50 cents a gallon. Then we find out that it really hasn’t broken, but it takes two months for it to finally get back to where it was.
Nun agrees, adding that a decrease in demand or an increase in supply will have to continue for some time before price cuts occur further down the pipeline. “The future will collapse because investors recognize that production will resume. But the demand is still there, so there is no compelling reason for producers to lower prices until they finally see a reduction in orders. And right now they’re selling whatever they can produce, ”he says. “There has to be a drop in demand or a big increase in supply before prices really start to drop to our level.”
Morris concludes, “Everyone has seen articles saying lumber prices drop 49% or more and think this is affecting their ability to acquire a new home. It’s completely disconnected. The only place you see that’s in the Wall Street Journal. The volatility of this market creates the need for everyone to understand that the buyer is the one who is going to be at risk.