A few months ago, we reported that timber prices had hit an all-time high, adding to the cost of houses by a staggering $ 36,000.
But after a year of high prices and scarcity, the timber market is finally returning to earth. Prices have fallen 65% since May and are now around $ 600 per thousand board feet.
Although the cost is still almost twice as high as it was before the pandemic, wood production is finally catching up with demand.
When do price reductions reach the consumer?
The wood market works on a delayed schedule. On the manufacturing side, prices are starting to fall, but consumers won’t feel the immediate impact of lower prices until factories sell their older, higher-priced panels first.
This means that home builders still face higher costs when projects start, extending the timeline for any new build housing that is badly needed to alleviate the extreme real estate shortage in the market.
The housing shortage is nothing new. A June report by the National Association of Realtors (NAR) found that the underbuilding gap has grown to around 5.5 to 6.8 million units since 2001.
“There is a strong desire to own a home in this country, but the lack of supply prevents too many Americans from realizing that dream,” said Lawrence Yun, chief economist at NAR. “From the results of this report, and from the conditions we have observed in the market over the past few years, it is clear that we have to do something dramatic to fill this void.”
The nature of the lumber market over the past year hasn’t made this any better. However, a breakthrough in the inventory crisis is showing signs that buyer demand is weakening – at least for now. The Census Bureau reported that home sales in June were down 6.6% compared to the previous month, down 6.6% from May and down 19.4% from June 2020.
Building applications also fell in June, although wood costs began to fall.
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But will prices continue to fall?
There is speculation that the current price of wood does not reflect actual market demand. Aberdeen Standard Investments strategist Robert Minter told Markets Insider last week that wood “looks a little cheap” right now.
This is because prices rebounded to over $ 600 in early August. July published numbers of around $ 550 per thousand board feet.
Minter says there is “a demand that has not yet been met” and explains that “people are moving from where they had to live to work to where they want to live. All the people who want to move from the city center and the nearby suburbs to a cheaper place, these people have not all moved. “
Tackle labor shortages and the possibility of the COVID-19 Delta variant resuming previous restrictions on the economy and it is not safe to assume that the labor market is still out of joint.
The National Association of Home Builders (NAHB) shares the same concerns. In a press release last month, the NAHB stated that sawmill production is still lagging, and if supply fails to meet demand, we could face the same dilemma as last November. At that time, the lumber market experienced a drop in prices, only to shoot up to record highs again.
Construction costs don’t stop with wood
While most of the attention has been devoted to frame lumber, many have forgotten to investigate other construction costs, some of which are still at record highs.
For example, the prices for Oriented Strand Board (OSB) have risen by 510% since January 2020 without any noticeable calming down. It is surprising that no attention was paid to OSB, considering that in 2019 it made up almost two-thirds of wood panel wall and roof cladding.
It doesn’t end there. Copper prices are still near record prices, making electrical and cabling projects just as expensive as they were when the lumber was exhausted. In addition, labor costs are rising in an economy desperate for labor. The Associated General Contractors of America reported earlier this year that construction wages had increased by about 3.2% from 2020 to just over $ 30 an hour.
With all these rising costs, the prospects for the new building are difficult to predict. However, as long as some costs subside, this is welcome news for most.
For real estate investors, the best price-performance ratio is a key success factor. Unfortunately, in an economy where everything is getting more expensive, it becomes much harder to find deals.
It is important that we continue to pay attention to the wood market as it will continue to paint a picture of the impact COVID-19 is having on our economy and local markets.