Out of the Woodwork: Do Lumber Prices Drive the Housing Market?

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For the last two years, lumber prices have been on a rollercoaster ride that has given the country, the housing market, and buyers and sellers whiplash.

So far, the prices have skyrocketed twice to astronomical heights before plunging precipitously. Predicting where the market may go next is a gambit for forecasters and investors in lumber futures.

However, lumber prices still have a major impact on today’s buyers and sellers. That’s because nine out of 10 single-family homes are wood framed and lumber costs typically range from $30,000 to $40,000 per home. So, any rise in the price of lumber has the potential to catapult home prices into the stratosphere.

So, we’re bringing you into the loop with the latest on lumber prices, how they can impact the housing market, and helpful expert advice about buying or selling a home in this dynamic market.

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Lumber Price Peak 2021

While the twin peaks occurred in the spring of consecutive years, very different factors conspired to cause recent price hikes.

In 2020, no one could have predicted a global pandemic would result in a historic federal stimulus package, a home renovation boom, and historically low mortgage rates that conspired to supercharge the demand for homebuilding and lumber.

Beginning in January 2021 through May, lumber prices rose 96%. In April, they crested in the first pandemic high at $1,500 per thousand board feet — a 300% increase over pre-pandemic levels.

The table below shows an example of the rise and peak of costs by comparing the producer price index (PPI) of softwood lumber, a common wood used in residential construction.

Softwood lumber prices 2019-2021

*Producer Price Index: Softwood lumber (BLS series ID: WPU0811)

Source: Bureau of Labor Statistics

The meteoric rise was due to a:

Sawmill slowdown: Based on previous downturns in the market, sawmills furloughing staff because they anticipated a decrease in demand and COVID protocols resulted in limited production capacity. By April 2020, U.S. wood production had fallen 15% from 2019.

High demand from DIYers: Stay-at-home orders forced many homeowners to literally face the home repair project they had put off for years. Not only did they have the time to do the work, but Americans also had access to online DIY tutorials about techniques, and stimulus checks to pay for materials.

Homebuilding boom: Homebuilding starts peaked in March 2021. Historically low interest rates, realities of work- and school-from-home orders, and stimulus checks encouraged many American families to consider home ownership or upgrades.

By August 2021, prices had zoomed down to $483 due to:

DIYers walking away from high lumber prices: Once the price of lumber topped $1,515 per thousand board feet in the Spring, DIYers stopped buying lumber in favor of composite wood and other options.

Sawmills increased production: At the same time, sawmills trying to cash in on the sky-high prices increased production.

Housing starts to slow: During the summer and fall, housing starts declined only to rebound in December 2021.

Of course, the lower prices didn’t last. From August to December, lumber prices lurched up 182%.

Lumber Price Peak 2022

By February, prices had rebounded to $1,337 per thousand board feet. The 2022 ascent is different from the previous year.

The 2022 market acceleration has been driven by different forces including:

Severe weather in the American West and British Columbia: Early in 2022, the lumber industry experienced shortages of raw materials due to a fierce wildfire season in the Pacific Northwest, a key production center for North American softwood, and devastating December floods in Canada created transportation challenges that delayed delivery.

Higher U.S. tariff on Canadian lumber: In November 2021, Biden’s Commerce Department nearly doubled duties on softwood lumber imported from Canada from an average of 8.99% to 17.9%.

High labor costs: Like all sections of the economy, the entire lumber supply chain is experiencing a labor shortage.

Early orders: Anticipating potential price hikes and shortages, buyers began putting in orders earlier than they had historically, which diminished available stock.

The second upward spiral reached its zenith in February 2022. Then, from April to June, prices once again plummeted more than 50%.

The 2022 price hike roll lost momentum due to:

Reduction in the tariff: In January 2022, the Commerce Department issued its third administrative review that reduced duties on Canadian softwood lumber from 17.99% to 11.64%.  Still, the tariff remains higher than during the pre-pandemic era, so the reduction hasn’t really provided tremendous relief.

Rising mortgage rates decrease demand: To fight inflation (see below) by curbing consumer spending, the Federal Reserve raised mortgage rates three times in the first two quarters of 2022.

And it’s hard to predict what trends lie just around the bend.

The table below shows 2022 lumber price trends by comparing the PPI of softwood lumber from January through June.

Softwood lumber prices January-June 2022

*Producer Price Index: Softwood lumber (BLS series ID: WPU0811)

Source: Bureau of Labor Statistics

Has the lumber market always experienced these extremes?

Like the prices of many commodities in the pandemic era, the unpredictable twists and turns of the lumber market are unprecedented in modern times.

A Realtor® with 13 years of experience, Joseph Lawson of the Cabell Childress Group in Richmond, Virginia, says, “I’ve seen the market shift dramatically; but, I don’t remember a time where lumber or really any prices have skyrocketed as dramatically as they have in the last 24 months.”

Five-year data from Statistica confirms that perception.

From January 2016 through June 2022, the price of timber in the United States fluctuated from a low of $240 per thousand board feet in January 2016 to a summit of over $1,500 in April 2021.

From January 2016 to January 2020, the most dramatic shift in the market was from $240 to $569 — an increase of 137%.

Since then, the changes have been anything but gradual.

Between June and September 2018 and again between August and October 2020, prices fell 50%. From October 2020 to May 2021, prices zoomed up 300% — only to fall again by 75% from May 2021 through August 2021.

By July 2022, lumber had come back down to $663 — nearly half of their year-to-date pinnacle.

However, “they’re still a lot higher than they were pre-pandemic era — as with pretty much everything right now with inflation,” Lawson says. “When just raw materials cost more, that makes building a home, doing a renovation or any type of new construction cost more as well.”

Will lower lumber costs help housing prices come down?

Even though production has rebounded, there’s still not enough lumber to build the houses needed nationally — an estimated 2 to 4 million homes.

In fact, the housing shortage has prompted President Joe Biden to launch a plan that aims to close America’s housing supply gap within five years.

So, with such a huge deficit on the supply side, prices are unlikely to decrease significantly.

When will consumers and builders see lower prices?

Get ready to buckle up for what’s expected to be a long ride.

When lumber prices rise, consumers see an almost instantaneous increase in prices from retailers and builders. However, there’s rarely an immediate and significant decline in what consumers pay when those prices decline.

Similar to gas prices at the pump, a price reduction in the cost of lumber for wholesalers doesn’t necessarily correlate with an immediate reduction for consumers.

“It will take a sustained downward trend for the typical builder to get any relief,” explains David Logan, director of Tax & Trade Policy Analysis for the National Association of Home Builders.

“Due to the mechanics of the lumber supply chain, builders and homeowners are unfortunately the last to see their costs go down.”

For example, despite a 52% decrease in lumber futures in June 2022, Logan reports prices paid by builders since late May have declined by a fraction of that amount.

So what does this mean for homebuyers?

Not surprisingly, the buyers who purchase new construction or build a custom home are the most vulnerable to the volatility of the lumber market.

“As builders have incurred higher material costs and labor costs, the price of the new construction has risen,” says Lawson. “Those higher prices directly impact buyers’ purchasing power and the cost of the acquisition of the property.”

Buyers interested in purchasing an existing single-family home are largely immune from the uncertainties of lumber pricing.

“Unless the purchase price of the resale property is based on new builds in the area,” Lawson says, “buyers looking at an existing home shouldn’t be affected by the lumber market.”

How do lumber prices affect home sellers?

In general, Lawson says, lumber prices have not deterred homeowners from making the decision to sell their house.

However, the price of lumber has the potential to increase the cost of the sale if renovations are required before listing.

For example, based on the advice of their market-savvy agent, homeowners may decide to replace their deck prior to listing the property.

“Replacing a deck has never been a cheap endeavor,” Lawson says, “but, it’s become dramatically more expensive — double or triple the price that it was just three years ago.”

It doesn’t take long for a series of even smaller repairs or big-ticket renovations to add up. To compensate, sellers command a higher sale price.

“Even if the costs incurred to get their house ready to list are higher than a couple of years ago,” Lawson says, “sellers have a high level of confidence right now in terms of both days on the market — the timeframe for the sale — and their expected sales price.”

In fact, those expectations have contributed to the low inventory market. “Homeowners know their house is going to sell quickly,” he explains “They don’t want to sell before they know where they’re going to buy.”

Sellers face the same obstacles in today’s market as other buyers with the possible exception that — because of their recent sale — they may have more cash or equity available to make a competitive offer.

What other factors are influencing home prices?

The cost of lumber is only one of the factors that drive the housing market. Some of the most significant vectors include rising mortgage rates and the country’s highest inflation in four decades, which has zapped the purchasing power of consumers and builders alike.

Mortgage Rates: Having nearly doubled from a year ago, the traditional 30-year fixed mortgage now hovers above 5% — the highest it’s been since 2009.

The result is fewer buyers are able to afford the home they want. Not surprisingly, by June 2022, mortgage applications fell 21% from the previous year.

Inflation: Battling the highest inflation rate in four decades — 9.1% — has caused many consumers to conserve their current resources rather than seek to expand expenses by considering the purchase of a new home.

And consumers are not alone.

Since the pandemic began, lumber is far from the only contentious commodity builders have had to wrangle. Everything from appliances to windows has been in short supply and getting more expensive seemingly every day.

“The residential construction industry has experienced inflation in raw materials costs going back to 2021,” says Logan. “The breadth of inputs and magnitude of price increases have been astounding.”

Since January 2021, builders report they have experienced price increases in:

• Asphalt (+131%)
• Drywall (+32%)
• Exterior paint (+49%)
• Interior paint (+33%)
• Ready-mix concrete (+14.0%)
• Steel mill products (+102%)
• Truck transportation of freight (+32%)

The 18-month price increase of each item represents a record high.

Regaining a sense of balance after a turbulent ride

Despite the mercurial markets, Lawson remains optimistic.

“As mortgage rates cool the real estate market, supply chain issues get resolved and the demand for lumber slows down a little,” Lawson says, “I think we’ll get closer to an equilibrium, which will continue to help stabilize prices.”

During a turbulent housing market, it’s important to partner with an expert navigator.

If you’re buying or selling a home and are concerned about lumber prices, interest rates, or inflation, consulting a top-performing, proven real estate agent can help you ground your expectations to reach your goals.

Header Image Source: (Jatin Jangid / Unsplash)