The price of lumber is wild right now and it’s a disaster for the already disastrous housing market

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The lumber crisis is a big problem. CHRISTINNE MUSCHI/Reuters
  • America is facing a housing – and lumber – crisis that’s not going away.
  • The lumber industry can’t keep up with demand, with prices up over 85% year-to-date and 280% in the past 12 months from May 2021.
  • It’s limiting a shrinking housing inventory and contributing to lack of affordability for first-time buyers.
  • See more stories on Insider’s business page.

The economy is reopening at such speed that it’s caused all kinds of shortages, from chicken wings to computer chips. But nobody saw lumber coming.

America is in a lumber frenzy, and it’s not abating anytime soon.

Even though prices fell for six straight days in mid-May, Markets Insider’s Will Daniel reported they were still up more than 85% year-to-date and 280% in the last 12 months.

The lumber industry is struggling to ramp up supply as exploding demand is clashing with limited production, resulting in high price tags and an overall shortage.

The thing is, you need lumber to build new houses, and Americans really want new houses right now. The number of homes for sale has never been this low, and new builds are a way to supply houses for everyone who wants them – and a lot of people do.

“We entered the sort of unique period of 2020 underbuilt by at least a million single-family homes,” Robert Dietz, chief economist at the National Association of Home Builders, told Insider. That was a disaster for home-shoppers during the pandemic, as low mortgage rates drove a housing boom, resulting in record-high prices, bidding wars – and a historic shortage of homes.

As builders moved to increase supply, expensive lumber added to the price. The National Association of Realtors reported in February that rising lumber costs added $24,000 to the cost of new homes since the start of the pandemic. As of April, that number had increased to nearly $36,000. Home prices have been on the incline for years, but they reached a boiling point during the pandemic. In April, the median home sales price rose to an all-time high of $375,000, according to Realtor.com.

“When we’re talking about the price and availability of lumber, we’re talking about housing affordability conditions,” Dietz said. “Those higher costs ultimately will dictate the amount of supply that’s available.”

The implications are disastrous for more than just houses. In an interview with Insider, award-winning portfolio manager Michael Gayed warned that a lumber crash could lead to a stock market crash.

“If I look at the lumber futures continuous contract going back to 1980 versus what’s happened in the past six to seven weeks, this looks stupid,” he said of the run-up in lumber prices. “This is absurd. There’s nothing that justifies this.”

The lumber crisis is intensifying an already heated market for first-time buyers

Lumber’s record high prices date back to the onset of the pandemic and come from the combination of a supply chain under a huge amount of stress and a massive jump in demand.

In March and April 2020, sawmills shut down due to pandemic-related safety restrictions, and lumber has taken off ever since they reopened.

“The price gains are being led by the huge demand from home builders and do-it-yourselves with the strength in the housing market,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told Insider, adding that demand would have taken off even without sawmills being shuttered last year, which only made the supply situation worse.

Lumber
Lumber production can’t keep up with housing demand. Justin Sullivan/Getty Images

In addition to accelerated demand, the supply of lumber has also been strained by insufficient domestic production due in part to the 2020 wildfires, while internationally, limited access and hefty tarrifs on Canadian softwood have also added to the shortage.

Another thing exhausting supply: wooden pallets. Consumers have leaned toward buying more durable goods such as large appliances and furniture during the pandemic, and those are shipped on wooden pallets, which are obviously made of lumber, Joe Sanderson, managing director of natural resources at Domain Timber Advisors, told CNBC.

The reality is that contractors have been underbuilding since the Great Recession. Gay Cororaton, the director of housing and commercial research for NAR, told Insider. There could be more homes on the market absent a historic lumber shortage, she said.

Affordability challenges will continue to push homeownership out of reach for many first-time buyers – many of whom happen to be millennials. That generation has just reached peak age for first-time homeownership, another driver in 2020’s housing boom, which quickly turned into millennials’ second housing crisis in 12 years.

While some millennials are finally taking steps toward homeownership, others are further from doing it than ever. According to a Pew Research Center report, 52% of young adults lived with at least one of their parents as of July 2020, topping the last high of 48% many decades ago, in 1940.

Home construction
A red-hot real estate market has kickstarted new home construction, but builders face a shortage in lumber. Chris Delmas/AFP/Getty Images

“That collapsed household formation has occurred because of housing affordability burdens,” Dietz said. “When we’re talking about lumber, we are talking about the cost of people obtaining safe, decent, and affordable housing.”

To be sure, the price of lumber has been decreasing since May 7. Lumber trader Stinson Dean told Bloomberg he thinks the “lumber squeeze” is over due to a behavioral shift in among buyers and an increase in inventory among big bix retailers. But prices are sill much higher than they were before the pandemic.

On May 14, the National Association of Home Builders posted on Twitter two quotes for lumber packages from an Alabama supplier. The quotes are three months apart and show a difference of over $30,000.

-NAHB (@NAHBhome) May 14, 2021

Lumber remains expensive and scarce

Without a solution to the lumber crisis, affordability will remain out of reach for many prospective homebuyers as supply remains scarce.

“Housing is anywhere between 15% to 18% of GDP, and in that supply-chain discussion, we need to be thinking about lumber as well because about 90% of newly built single-family homes are wood framed,” Dietz said. “From a policy point of view, policymakers really need to be taking seriously the idea of improving and expanding the supply chains.”

In March, The National Association of Homebuilders wrote a letter to the Department of Commerce asking for the Biden administration to attend to the rising price and shortage of lumber.

“The potential for housing and construction to grow and lead the economy is limited as long as lumber remains expensive and scarce, and the ramifications for job growth are significant. Building 1,000 average single-family homes creates 2,900 full-time jobs and generates $110.96 million in taxes and fees for all levels of government to support police, firefighters and schools,” the letter reads.

Indeed, US Trade Representative Katherine Tai addressed rising lumber prices during a Senate Finance Committee hearing on Biden’s 2021 trade policy agenda earlier this month, and said she’s pushing for a solution.

“This is not just something we’ve been talking about within the administration but something that I’ve raised directly with my Canadian counterpart and I’ve certainly heard a lot from members of Congress about this as well,” she said. “I want to assure that I will be raising this again with my Canadian counterpart at the free trade commission meeting of the USMCA and I will continue to push for solutions to the lumber pricing issues that we are experiencing.”