Consumers will not see savings immediately even though lumber prices are falling

Photo: Finn Mund/Unsplash

Building or improving a home has been getting more expensive since the start of the COVID-19 pandemic due to rising lumber prices. But there are signs that the prices are letting up. As of 16 Jul 2021, future contracts fell to US$536 per thousand board feet of lumber, a 68% drop from $1,670.50 on 7 May 2021, according to The Wall Street Journal.

Since March 2020, many industry professionals in the US were unsure of how the pandemic would pan out. US lumber companies started to scale back production so they wouldn’t be stuck with a glut of supply with little demand. This contributed to the high rises of lumber prices, according to Tim Morris, associate broker with HomeSmart and former homebuilder.

“The biggest factor really comes down to prices going up because they can. There’s more demand than supply,” Morris commented. He added that the supply was also affected by Canada’s lumber industry, since the industry there is subsidised by the government, meaning that Canadian lumber companies can sell their products cheaper than their US competitors. The US government retaliated by instituting antidumping rules that put tariffs on Canadian lumber when it crosses the border, which disincentivised trade between the two countries, though it still occurs.

“Because Canada had a stricter approach to COVID-19, a lot of the loggers went home and got paid more than they would risking their lives felling trees in the wilderness,” Morris said. “So, the Canadian supply evaporated, and then demand went crazy.”

And many Americans stuck at home started on home improvement projects because of stay-at-home orders. “The volume of lumber bought at Home Depot went through the ceiling until about a month ago. Suddenly, a piece of plywood was $100, while it was $17 in April 2020,” Morris continued.

Future lumber prices

Homebuilders usually receive lumber prices from a framing contractor, who gets information from a lumberyard, which priced a train car of product based on a middleman’s contract with futures holders.

Tom Nun, owner of Horizon Commercial Contracting, has seen his business affected by price uncertainty: “Our clients need to have a firm idea of what their costs are going to be so they can calculate their return on investment and see if a project makes sense. With moving prices, it’s a tightrope to walk because we have some limitations from the lumber suppliers on how long they’re willing to hold the price that they float.”

Lumber is bought and sold with future contracts. As Morris explained: “The lumber that’s going to be produced next March is already sold to somebody on a futures contract. Some investor is buying it in hopes that they’re going to get an uptick.”

Furthermore, wild cost swings affect profitability. He explained: “In April 2020, I was building in Casa Grande and was paying $31,718 for the framing. Today, that same job costs $80,357. And there’s been three-month periods where prices vacillated as much as $25,000. That’s more than the whole margin in the house.”

Nun noted he has heard from subcontractors that they’re getting five-day quotes for plywood and oriented strand board (OSB). “That becomes difficult on my end 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 anybody to respond to those kind of time limits,” he said.

Although lumber prices are going down, it will take time for the end user to see savings. A decrease in demand or increase of supply will need to continue for some time before price reductions happen further down the pipeline.

“Future prices will come down because investors recognise that production will come back up,” Nun said. “But the demand is still there, so there’s no compelling reason for producers to drop prices until they finally see a reduction in orders. And right now, they’re selling everything they can produce. There has to be a drop in demand or a big increase in supply before prices start to really come down at our level.”

Morris concluded: “Everybody has seen articles saying lumber prices are falling 49% or more and think that affects their ability to acquire a new home. It’s completely disconnected. The only place you see that is in The Wall Street Journal. The volatility of that market is creating the need for everybody to understand that the buyer is the one who’s going to be at risk.”

Source: AZBigMedia