Just like all the other good news in the world that we currently get bombarded with, a reoccurring story on the sidebar is the exorbitant and runaway cost of lumber prices. Colleagues are talking about it at the lumber yards and happy hours, and clients are asking me what’s the deal. Should they hold off on their dream projects? What’s going on?
As a Southern Oregon custom home builder for over 25 years I, reluctantly, can say I’ve been in the biz long enough to know a little about these cycles. However, I’m not going to say that anyone can predict the future. Many of us rode out the rough time of the last ‘great’ recession. Some of these cycles can be viewed as small blips on the overall financial horizon, albeit this specific one has been going on for a year or so.
Some data: According to Bureau of Labor Statistics Producer Price Index (PPI) last month, overall construction materials have risen 19.4% in the last 12 months. This is a stark contrast to the overall increase of 1.2% between 2015 to 2019. Steel prices have been on full send rising 108.6% in the last year, 89.6% in 2021 alone…10.8% just this July! Gypsum has risen 15.8% in 2021 and 21.7% in the last 12 months. This comprehensive increase has only dipped twice since December of 2019. Explosion you say?
So, what has caused all of this? It hasn’t been good news among all of our other not-so-good news. For starters, it has been partially the pandemic. Easily triggered lumber producers, coming off of the not-so-distant recession, were quick to put on the brakes in fear of a recession or at least drop in demand. They cut back production in order to stave off a glut of material goods not going to market. With covid running wild they were uncertain of the pace of construction. Time to scale back. Remember supply and demand from back in the school days? Yep. Always at play. This reduction in production and subsequent lower supply was met head on with an actual surprise increase in demand. What? Why? Interest rates have been good and, on a smaller and local scale, we in the west had fires reducing home inventory that needed to be rebuilt, and many home improvement projects were happening while people were home doing the quarantine thing. I was in our local Ace Hardware store, and they said they were having record months! Demand! An increase in demand plus a reduction in inventory means high, high prices.
Now the turn around! Yes! Lumber producers instantly crank up production. Vaccines are happening, consumer confidence is rising, and suppliers say ‘hey, we really need to take advantage of these exorbitant prices’ with…yep, more lumber! Produce as fast as you can. Supply is happening here.
What does that mean for today? Mills have ramped up production. Supply has caught up with demand. Now the freefall. As of 8/28/21, lumber has fallen to $389 per one thousand board feet. This is a huge drop from the $1,515 prices we saw just last May, which is down an overall 74% from a year ago high! Lumber is on its thirteenth consecutive week price drop. Softwood lumber PPI is down 29% since July.
What does that mean for us builders and homeowners? The market is always trying to stabilize itself. This stabilization will take time as prices freefall. We are the end users. It’s like a rollercoaster. The ride has clicked its way up the to the top of the big drop. The producers at the front have their stomachs dropping out as they descend. We, at the tail end, are full of anticipation ready to do the same. Put your arms in the air!
Prices are dropping. Things are good!
*Sources: NHBA, Wall Street Journal, Fortune