What is happening to lumber prices?

If you have heard anything from homebuilders to contractors there are some pretty noisy complaints about the cost of wood these days. Without going into too many specifics, prices are up. And not in a good way. If you just look at basic materials needed for renovations or new homes you will see in some circumstances they have doubled in cost over the past 12 months.

Seems like everybody is looking for someone or something to blame. Whether it be a political party, a regulation or restriction, a financial institution or whatever else. When I break down the variables that impact how this has come to be it would only make sense to blame free market capitalism and how it has been affected by our national housing situation and “pandemic variables”.

I’m not going to pretend like you don’t understand that free market capitalism works within the basic structure of supply and demand. So assuming we are all on the same page: At this point, in the United States, we are very short on housing. I have talked about this in blogs prior.

So before rolling into this pandemic, demand was up. In addition to the undeniable need for materials to support this “housing crisis“ there have also been historically low interest rates. This has further increased the demand for builders to pump out properties. Some homeowners will take advantage of the low interest rates and refinance and save some money.

If the numbers work out in their favor then they might do a home equity line of credit and do some renovations or add an addition.

Guess what that does?

Yep, you got it. It increases demand. And up goes the price again.

The variables impacted by Covid focus a lot around lumber mills, many of which are in Canada. In early 2020 the scare of this pandemic made many Canadian lumber mills think that demand would dip with a looming economic crash. So what they did is they really drew back production to attempt to manage the pending decrease in demand.

But you know what didn’t happen?

A decrease in demand.

So now we are dealing with less supply and a huge need and a demand that is increasing. So what do you companies do in these situations? Well, a brilliant business owner leveraging free market capitalism to their benefit would double prices. And that’s why you will get half as much lumber today as you would a year ago for the same price.

There are distribution challenges as well that mills are facing from “lock downs,” these also throw off the variables. But these are slowing ending.

Production will increase in Canada and other lumber mills and distribution will improve when Covid restrictions have lifted. We will see these prices come down slowly over time. But in the United States, we will not see a massive decrease in the need for materials overall. We will not see a significant decrease in the need for more homes overall.

While builders try to keep up with the demand, unless our population growth starts to slow, they will not keep up. Prices will continue to creep up. And in the high density, desirable areas, they will creep up quickly.