"With a historically low level of overall housing inventory and solid demand due to low mortgage interest rates and favorable demographics, new construction has been unable to add additional needed supply to the market, resulting in unsustainable gains for home prices," wrote David Logan, director of tax and trade analysis at NAHB. The do-it-yourselfers will have a good excuse to postpone new projects.NAHB calculated these average home price increases based on the softwood lumber that goes into the average new home, as captured in the Builder Practices Survey conducted by Home Innovation Research Labs. In the meantime, homebuilders will pass the costs along to their buyers.
The key to the pace of decline will be mortgage rates. Prices will remain high for another two or three years, then drop back to more normal levels. This year look for not a decline but a leveling off. Lumber and plywood prices typically rise in the spring and drop by the end of fall, by about five percent. With lower growth of population and households, the historical 1.5 million housing starts is reasonable as a boom year, not an average. And population growth has slowed more in recent years because of very low immigration. In the last decade, growth averaged only 1.1 million households. In the 1960-2010 era, the number of households grew by 1.3 million per year. Over the past decade, however, our population growth was just 0.6%. Over that earlier time period, population growth averaged 1.1% per year.
Lumber prices skyrocket driver#
That reasoning fails to consider population growth, the largest driver of housing demand. Housing starts averaged 1.5 million units per year from 1960 through 2010, but the last decade has been below that benchmark. Some wood products executives see recent demand as a return to normal, rather than abnormally high. At that point, lumber and plywood sales will drop to more normal levels. (I predict mortgage rates will rise in the later months of 2021 and more rapidly throughout 2022, but my fellow economists see more muted increases.) By the end of 2023, the strong increase in demand for housing will be over. At some point, most of the people who can take advantage of low mortgage rates will already have bought a house. Lumber and plywood prices will drop as demand falls. It also explains why prices rose so sharply in the past year. These constraints mean that increased supply won’t bring prices down any time soon. Glue shortages, caused by the storm-related shutdown of petrochemical plants in Texas, also lowered plywood production, but that’s a temporary problem.
Lumber prices skyrocket drivers#
Truck drivers are in short supply across the economy. On top of the direct labor challenges, truck drivers are vital to production, starting with moving logs from forests to mills and then getting finished products to distribution centers and lumber yards. Finally, the stimulus checks and unemployment insurance bonus payments have sapped some people’s interest in taking jobs. On top of that, mills are usually located in rural communities that have been losing population. There has been a long-term trend away from blue collar occupations, partly a result of educators telling high school students they have to go to college. Mills also have difficulty hiring new workers. A few Covid-19 outbreaks among production workers have disrupted production. Producers are trying to increase the output of existing mills, but labor is a challenge for most of them. Thus, building a new mill today would probably take more than two years. (The Financial Post reported, “A plague of tiny mountain pine beetles, no bigger than a grain of rice, has already destroyed 15 years of log supplies in British Columbia, enough trees to build 9 million single-family homes, and are chewing through forests in Alberta and the Pacific Northwest.”) The construction of the new southern mills begun in 20 led to long lead times for mill equipment. Before the pandemic, many new mills were being built as production shifted from Canada to the South. Wood products companies would like to add capacity, but a new mill takes about two years to build. With extremely low mortgage rates, purchases penciled out in 20. Working remotely persuaded a few long-time apartment dwellers to buy houses, but the huge impact came from families that had anticipated buying a house in a few years.
The low mortgage rates brought more buyers into the single family real estate market.
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