Housing’s Rapid Recovery

Soaring lumber prices could dampen the rebound

By Chuck Fowke

Record-high lumber prices are driving up housing costs and could slow new residential construction, potentially dampening a housing-fueled economic rebound from the COVID-19 pandemic and derailing efforts to tackle the nation’s ongoing housing affordability crisis.

Residential construction is poised to lead the nation out of the current downturn – as it has during almost every major economic disruption over the last five decades. Historically low interest rates, a renewed focus on the importance of home and pent up demand for housing have spurred sales.

But a significant runup in lumber prices over the last few months is threatening to slow the homebuilding industry.

The Random Lengths Framing Composite Price for lumber hit a record $627 per 1,000 board feet at the end of July, the first time prices have topped the $600 level. Framing lumber prices have soared 80% since mid- April, while the price of oriented strand board jumped a whopping 138% from a year ago to $550 per 1,000 board feet.

Driving the price surge is a shortage of supply. Most mills closed due to stay-at- home orders and social distancing measures enacted by state and local governments at the onset of the coronavirus pandemic. Mill operators projected that housing would be adversely affected by the crisis and anticipated a large drop in demand. Many mills that remained open substantially decreased their output.

But housing weathered the storm much better than anyone could have predicted, and demand for lumber remained high. Recent data show a rapid rebound in the homebuilding industry, highlighted by increased builder confidence and rising permits and sales.

After an initial decline at the onset of the pandemic, the most recent NAHB/Wells Fargo Housing Market Index (HMI), which measures builder confidence in the market for newly-built single-family homes, posted its largest monthly gain in its 35-year history. The HMI returned to its pre-recession level of 72, up from a low of 30 in the spring. The quick advance of the HMI over the course of the summer is a strong indicator of an acceleration of single-family construction, which is required to meet solid, consistent demand for housing.

The data matches recent home construction data from the United States Census Bureau, showing single-family permits expanded by 12% and new single-family home contracts posted a 13% year-over-year gain while inventory fell to below a 6-month supply, supporting growth for new homebuilding.

There was also a significant uptick in demand from do-it-yourselfers tackling home remodeling projects, demand that has yet to subside even after states reopened.

Lumber tariffs averaging more than 20% on Canadian imports – where more than 95% of U.S. imports originate – have exacerbated the problem. Roughly one-third of the lumber used in the U.S. last year was imported.

To address the price volatility and the supply chain disruptions that have caused it, NAHB sent letters in early August to Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer. NAHB called on Secretary Ross and Trade Representative Lighthizer to work with Canada to develop a long-term solution to a trade dispute that has continued for nearly 40 years.

NAHB has also reached out to Zoltan van Heyningen, executive director of the U.S. Lumber Coalition, to explore strategies to ease market concerns for builders and consumers alike. NAHB is hoping to work with the U.S. Lumber Coalition to address shortages in the lumber supply chain caused, in part, by the pandemic.

Lumber prices have a significant impact on the cost of construction and the overall price of new homes. As lumber prices climb, more Americans are “priced out” of the ability to purchase a new home or find an affordable rental apartment, in turn worsening the nation’s housing affordability problem.

America’s homebuilders need access to reasonably priced building materials, particularly lumber, and an end to delivery delays to build homes that working families can afford.

Policymakers can address the price and availability issues by boosting domestic lumber production, reducing U.S. lumber exports to China and other nations, and seeking out new markets to curb our reliance on Canada to make up for our domestic shortfall. A resolution of the U.S.-Canadian softwood lumber dispute would also boost housing, and in turn, the overall economy.

Residential construction can lead the nation out of the current economic downturn, but it will be a harder climb if lumber prices remain extraordinarily high.

Chuck Fowke is chairman for the National Association of Home Builders. Learn more at nahb.org.