Prices Are Rising Due To A Shortage Of Lumber In The United States

An unforeseen result of the Corona crisis is the shortage of lumber in the United States which caused the building prices to skyrocket.

As the pandemic wreaked havoc on the US economy last spring, sawmills halted lumber production in order to prepare for a housing slump. The slump never materialised, and there is now insufficient lumber to feed the raging housing market.

The shortage of lumber in the United States is delaying construction of badly needed new homes, complicating renovations of existing ones and causing sticker shock for buyers in what was already a scorching market.

Random-length lumber futures hit a new high of $1,615 on Tuesday, representing a staggering sevenfold increase from the low in early April 2020. This is important because lumber is the most significant supply purchased by home builders.

“I’ve never seen anything quite like this,” said Brant Chesson, president and CEO of Homes By Dickerson, a home builder based in Raleigh, North Carolina.

Chesson stated that his company would like to build more homes to meet rising demand, but that it is currently unable to do so due to a lack of materials and labour.

“It’s definitely contributing to a housing shortage,” he said.

This can only last for so long

And, with the housing market on fire, the shortage of lumber in the United States is costing many potential home buyers even more money. According to a National Association of Home Builders analysis, rising lumber prices alone have increased the cost of a new single-family home by $35,872.

“While lumber prices have risen, we have been able to pass it on to the consumer with higher home prices,” KB Home (KBH) CEO Jeffrey Mezger told CNN Business. “And there is still significantly more demand than supply.”

However, builders cannot continue to raise prices indefinitely.

“This can only last so long before affordability is squeezed and demand slows,” said John Lovallo, Bank of America’s lead home builders analyst, in an email.

In March, the median sale price of existing homes increased by a record 17.2 percent to $329,100, the highest since the National Association of Realtors began tracking prices in 1999.

Lumber is so hot, it’s being stolen

Independent builders, who lack the scale advantages enjoyed by large construction companies such as KB Home, are already feeling the pinch.

Because of a lumber shortage, Tom McCarthy is unable to complete the construction of a home in Bergen County, New Jersey.

“There are some pieces of wood that we can’t find,” said McCarthy, a real estate broker with the Chen Agency who also builds homes on the side with his father.

McCarthy estimates that the cost of lumber for the home will be $70,000, nearly double the cost of constructing the same home in a nearby town just eight months ago.

Some renters are also bearing the brunt. According to the NAHB, the shortage of lumber in the United States has caused an increase of the market value of an average newly built multi family home by nearly $12,000, equating to households paying an extra $119 per month to rent a new apartment.

The scarcity and price increase are so severe that builders report having lumber and other raw materials stolen from their job sites.

“Theft has been a major issue in our industry. We’ve had tens of thousands, if not hundreds of thousands, of dollars stolen this year “Chesson, the North Carolina builder, explained.

Sawmills can’t keep up with demand

The current shortage has its origins in the previous housing boom. After the housing bubble burst in the mid-2000s, new home construction plummeted. Because the market was severely oversupplied, this made sense. However, the downturn forced the closure of countless sawmills, leaving the industry unprepared for today’s surge in demand.

Then there was Covid. Last spring, sawmills reduced output in anticipation of another downturn and to comply with health regulations.

“There was widespread concern among sawmills about preparing for a downturn. When the demand for homes increased, they were unable to open up enough capacity in a timely manner “said Lawrence Yun, the National Association of Realtors’ chief economist.

Simultaneously, demand for lumber is being driven by an increase in renovations and expansions of existing homes.

However, contractors are having difficulty locating and paying for lumber, adding to the consumer’s woes.

“It’s a cost that our members can no longer bear,” David Pekel, CEO of the National Association of the Remodeling Industry, said. “They have no choice but to pass the cost on to the homeowner.”

Industry calls on Biden to act

The lumber shortage is just the latest example of how the pandemic’s rapid economic recovery is straining supply chains. Manufacturers are in desperate need of labour. A shortage of computer chips has stymied smartphone, auto, and appliance production. In addition, a shortage of tanker truck drivers has raised the prospect of gas stations running out of fuel this summer.

Tariffs are exacerbating the shortage in the case of lumber. The previous administration hit Canada with tariffs of up to 24 percent on lumber in April 2017, in one of the first shots fired during Trump’s trade wars. Late last year, the Trump administration reduced the tariffs to 9%.

The building industry is now urging President Joe Biden to take additional steps. NAHB Chairman Chuck Fowke urged the Biden administration to “temporarily remove” the 9 percent tariff on Canadian lumber “to help ease price volatility” in a statement to CNN Business.

In addition, Fowke urged the White House to “bring together interested stakeholders to hold a summit on lumber and building material supply chain issues in order to identify the causes and solutions for high prices and supply constraints.”

A request for comment was not returned by the White House.

‘Sharp fall’ in lumber prices ahead?

The good news is that industry executives believe lumber production will eventually catch up with demand.

In a recent note to clients, Samuel Burman, an assistant commodities economist, predicted a “sharp fall” in lumber prices over the next 18 months.

“The mills are resuming operations. In terms of supply availability, I believe we’ve passed the worst of it “Mezger, the CEO of KB Home, stated

Let’s hope so, because the market desperately requires additional supply.

“In America, there is a housing shortage. More housing is needed to alleviate the shortage “Yun of NAR stated. “The housing market has created a divide between the haves and the have-nots. Homebuilders are ecstatic, but first-time buyers are dismayed.”

Source: CNN Business

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