A 325% surge in lumber prices over the past year has pushed new-home prices up by $24,000 apiece

Logging burnt trees
An active logging site among burned trees from last year’s Rim fire near Groveland, California July 30, 2014. Robert Galbraith/Reuters

Lumber prices hit another record high this week, trading above $1400 per thousand board feet as mills and timber companies struggle to meet demand.

In 2021, lumber prices are up roughly 57%, and over the past year, that number moves to more than 325%.

The meteoric rise in lumber prices has had effects all over markets, but new home sales have been particularly affected.

According to data from the National Association of Home Builders, lumber’s rise has pushed new single-family home prices up by some $24,000 in the last year alone.

In Bloomberg’s “Odd Lots” podcast with Joe Weisenthal and Tracy Alloway, Stinson Dean, a lumber trader at Deacon Trading, discussed the run-up in lumber prices and the complex history that has led the market to historic supply constraints.

Dean said that during the pandemic, the lumber industry predicted prices would fall, but instead they rose over 120% on the year.

Typically, rising prices and demand will force suppliers to add to their inventories, but as Dean elaborates, the lumber industry’s conservative nature prevented many from making that move.

“High prices cure high prices, but in our industry, high prices raise concern and people get really scared that it’s just going to crash. So, everyone was slow to believe in the recovery, so no one invested in inventories effectively. That hesitation to lean in and put risk on perpetuated this situation that were in that has been such an acute run up,” Dean said.

Dean noted that the tumultuous history of the lumber industry, particularly during the great recession of 2008, has created a conservative group of timber operators.

“What happened and is happening right now, I think, is ultimately a result of the scars of the great recession and the conservative nature of our industry not wanting to put risk on via lumber inventories,” Dead said.

Dean went on to describe structural issues that have also added to supply constraints, including a beetle infestation and a falling annual allowable cut (AAC) in Canada.

The story goes like this – the AAC was expanded amid a pinewood beetle infestation in the mid-2010s, because the Canadian government wanted to get infected trees out of the forest while they were still harvestable and reduce fire risk, according to Dean.

This caused a stagnation in prices for several years before, in 2015 and 2016, the Canadian government began reducing the total annual allowable cut, which “devastated the industry” and led to a wave of mill closures.

That wasn’t a problem until demand for housing and renovations boomed amid the pandemic.

“We were going to grind higher to a price like this, eventually, but COVID did it’s thing and we did it all at once,” Dean said.

Now, lumber markets are missing the supply that was lost after the Canadian government reduced the AAC, and there are fewer total logs because of the beetle infestation, but demand continues to rise.

“So, here we are, less logs to cut, less mills to do it with, and you have an industry, a sawmill industry, that really has had mediocre returns for 10 years, and now here’s their moment to maximize.”

In the long run, Dean believes rising prices will be good for the logging industry as a whole. Sawmills, in particular, are set to benefit from higher lumber prices.

“If we’re higher for longer, everyone’s going to do very well…I think at the end of the day…it’s a great thing for the industry,” Dean said.

Unfortunately, on the consumer side, high prices will continue to hurt demand for new homes and keep people from renovating.