Higher Lumber Prices and
the Housing Market

The housing market for owners of existing houses
for sale has been a pleasant experience over the past
year. In many locations across the country, the seller
can name their price and have often seen a handsome
profit. The inventory of available homes on the market
has fallen.

The new home market has also seen price appreciation
but it hasn’t been for the same reason in recent
months. That is because the cost to build these homes
has skyrocketed. It is really a chicken-before-the-egg
scenario that explains what is going on.

The pandemic had caused more demand for homes out
in the suburbs and exurbs for those people who have
shifted to remote work and those living in congested
areas who needed more breathing room.

That demand has not been met recently.

The rise in the cost of building materials, along with
rising mortgage rates is having a dampening effect
on the housing market. This is a concern since the
housing sector accounts for 15 to 20 percent of the
nation’s gross domestic product. (GDP)

In just over one year, the cost of lumber is up more than
170 percent. That adds $24,000 to the cost of building
the typical house. There have also been some increases
in the cost of concrete and other supplies that go into
the building of a house.

This has hit the housing market and housing
starts were down 10.3 percent in February.
Building permits declined by 10.8 percent as well;
both coming in well below analyst estimates.

At the very beginning of the pandemic, lumber
prices were actually in a slump. That slump lasted
for five weeks.

Experts believe that the steep price increases more
recently are a result of supply-chain disruptions
paired with more demand.

A Drag on the Economy

National Association of Home Builders (NAHB) CEO
Jerry Howard said “there are some dark clouds on
the horizon.” He says that the additional costs of
a new house, associated with the increased materials
costs, may be enough to put them out of the market.
His concern is that the added costs can result in
a slowdown in the housing market which would
impact the economy.

Part of the current problem is that many home builders
have signed contracts with buyers and the increased
lumber prices will require builders to alert the buyers
that their home price has increased. This will likely
result in many contacts being cancelled. Howard
says this is already happening.

About 40 to 45 percent of the home-buying market
are first-time buyers.

In February, both housing starts and building permits
fell along with homebuilder confidence. A survey
of homebuilders in March found higher levels of
concern due to supply costs. The Wells Fargo/National
Association of Home Builders Market Index, a measure
of homebuilder confidence, fell by eight points from
November 2020 to March 2021.

Market analysts believe that lumber prices will remain
elevated throughout 2021. As long as the demand for
new homes continues, and stay-at-home workers find
reasons to expand their existing space, the price
of wood and other building products will make that
next DIY project more expensive.