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How an Increase in Lumber Prices Influence Home Construction Market

Over the past few years, lumber prices have increased drastically. According to the National Association of Home Builders, prices rose by 30 percent between Hurricane Harvey in August 2017 and January 2018. At the time, this price was higher than any prices on record since NAHB started keeping such records in 1995.

According to NAHB’s standard estimate of lumber used to build the average home, the recent spike in softwood lumber prices has caused the price of an average new single – family home to increase by $14,116 since April 17.  In the same way, the market value of the average new multifamily home increased by $5,322 over the same period owing to the surge in lumber prices.

Have it in mind that these estimates are based on the softwood lumber that goes into the average new home, including any softwood used in structural framing (including beams, joists, headers, rafters and trusses) sheathing, flooring and underlayment, interior wall and ceiling finishing, cabinets, doors, windows, roofing, siding, soffit and fascia, and exterior features such as garages, porches, decks, railing, fences and landscape walls.

The softwood products considered include lumber of various dimensions (including any that may be appearance grade or pressure treated for outdoor use), plywood, OSB, particleboard, fibreboard, shakes and shingles — in short, any of the products sold by U.S. sawmills and tracked on a weekly basis by Random Lengths.

It is important to note that builders do not generally buy lumber directly from sawmills, instead they go through an intermediate wholesaler or retailer—often a lumber yard. Therefore, sawmill prices are marked up by “gross margin as a percent of sales” for the “lumber and other construction materials” industry to better reflect the price builders pay.

Note that softwood lumber is also an input into certain manufactured products that are subsequently used in residential construction. These products are more or less marked up by the manufacturer before being sold to a lumber yard or other intermediary.

Therefore, to account for the manufacturer’s margin, sawmill prices are further marked up by the percent difference between receipts and cost of goods in the “wood product manufacturing” industry. In the average home, this mainly applies to cabinets, windows, doors and trusses.

According to this report, the total cost to a builder for all the lumber and lumber-related products described above use to be $16,927 for the products in an average single – family home, and $5,940 for the products in an average multifamily home.

But presently, the cost to builders had risen to $28,765 for the softwood lumber products in an average single – family, and $10,403 for the products in an average multifamily, home. This is an $11,838 (or 70 percent) and $4,463 (75 percent) increase, respectively, in only four months.

The price of the home has also increased somewhat more than this, owing to factors such as interest on construction loans, brokers’ fees, and margins required to attract capital to residential construction and getting construction loans underwritten. However, for items such as lumber that are bought and used throughout the construction process, NAHB has estimated that the buyer’s price will increase by an additional 19.2 percent.

These rampant prices are not only affecting the home construction industry, but are also creating a significant impact on developers, distributors, and contractors. Nonetheless, here are other ways the increase in lumber prices influence the home construction market.

Ways Increase in Lumber Prices Influence the Home Construction Market

  1. Project Delays

The rise of lumber prices is causing developers to consider whether or not to initiate new projects that haven’t already started for both residential and commercial construction. However, the larger the developer, the easier it will be for them because of their negotiating position. But smaller developers may not have the same type of negotiating position and could even have a reduced ability to pass any cost increase on to their customer.

  1. Budget Overruns

Rising lumber prices make it less likely that a development will move forward and increase the cost of delivering government-financed infrastructure, raising costs for homeowners, renters and office tenants, which serves to push nominal borrowing costs higher. With developers questioning whether to initiate new projects or to move forward with a job that is already in progress, contractors are at risk as fewer job may become available with a decline in developments.

  1. Additional Tariff

As lumber prices continue to increase steadily, additional tariffs will continue to impact manufacturers and an array of industries nationwide. Aside from project delays and budget overruns, there are a whole lot who have their jobs at stake due to the rising of these lumber prices.

Nonetheless, there are several solutions to help with lumber and labour costs as material prices keep surging. Designs can be modified and optimized to use less lumber and more steel, penalization can help conserve material and reduce wasted materials, and technology is constantly advancing and helping create new innovative solutions.

Optimizing designs, manufacturing in a controlled environment, and advancing technology are only a few innovative solutions that are helping revolutionize the construction industry helping mitigate the rise in lumber prices.

  1. Increase in Market Speculators

Since lumber is a commodity, it is fair to say that speculators have also gotten involved in the lumber market. Note that for businesses that prefer to buy their lumber inventories weeks in advance, the current situation has resulted in some panic buying as they try to stay ahead of the competition, gain a share of limited inventories, and try to maintain their build schedules.

However, when this kind of panic gets a hold of any commodities market, speculators often get involved and it can affect prices. With such a large supply gap in the market, it’s likely that volatility will remain until the supply and demand equalize.

  1. Home Buyers

For a home builder, the rising lumber costs may not necessarily be bad news. Indeed, the higher price entails that not only are housing costs going up, but mortgage costs are rising as well. The cost of single – family homes has risen by $16,000 on average—but the good news is that buyers are very willing to pay that higher price.

For instance, back in January 2017 and January 2018, housing stats were up all over the country—7 percent among single family homes. Between May and July of 2020, housing stats went up by an incredible 17 percent across the country. This number is down about 4 percent over 2019, but it still reflects that buyer confidence is high.

Notably, part of the reason for housing remaining steady despite the pandemic is that mortgage rates are at all time lows. In July, average rates for 30 – year fixed mortgages dipped beneath 3 percent, which is the first time rates have gone so low since Freddie Mac started to track this data in the 1970s.

Lumber prices are up today compared to prices over the last two decades, but they are expected to come down as the pandemic eases. Meanwhile, a high demand for new construction, particularly single – family homes, means that builders in the United States should quite easily be able to weather the volatile lumber market.

One thing is for sure – high lumber prices will eventually come to an end. Once supply and demand equalize, building slows, and the lumber supply chain catches up, we should see prices come back down to normal levels.