If anyone has taken a look at a project around the house or talked to a contractor regarding work requiring lumber they know just how much the price of lumber has appreciated over the last year. Increased input costs are making most jobs more expensive and some work not feasible in the short run due to the price appreciation. We’ve heard quite a bit about lumber over the last several weeks and get asked two main questions: 1. Why are prices so high? 2. When are they going to get back to normal? We’ll attempt to give you a little more information regarding both.
Why are prices so high? We have kind of experienced a perfect storm for timber over the last year. First, due to the pandemic many saw mills were taken off line for a period of time, limiting new supply available to come to the market. Saw mills, when allowed to operate also experienced capacity and hours restrictions in many locations making it more difficult to make up for time lost. In addition, while most Americans were spending the vast majority of time at home they engaged in home improvement projects increasing demand for lumber. This coupled with a tight supply of new homes available, low interest rates and the desire for some to leave city centers due to the new found capability to work from anywhere continued to increase demand as lumber is an essential input to housing related production. So when you have supply constraints and greater than normal demand it is a recipe for dramatic price increases and that is what we have experienced. Now, basic economics will tell us that as prices rise it will have the effect of suppressing demand as only the most necessary projects will get done at elevated prices and some will wait if they can for a price decline before proceeding, therefore the price increases that we are seeing are certainly unwelcome but are ultimately transitory in nature. Eventually there will be a supply response sufficient to meet the demand and ultimately this should give purchasers of lumber a little bit of relief.
So, ok, great, but when? And by how much? These questions are a little more difficult so I’m going to give an answer that may leave you unsatisfied, “it depends”. It depends on if the vaccine rollout continues a pace and we continue to see reduced COVID 19 infection and continued sustained reopening across the country so that the supply response of production and distribution may continue to ramp. If supply is allowed to catch up via increased production and new entrants into the market it should put downward pressure on lumber prices. It also depends on the demand response. If we continue on current trajectory consumers may opt to spend their dollars in places other than home improvement. If we see an uptick in mortgage rates we could see a reduction in demand for home purchases which may impact the number of new homes needed. Given these and a myriad of other variables we could see lower prices as early as late this year. The caveat however is that it is difficult to gauge the longevity of demand. If many consumers have projects that they are delaying because of prices any price relief in the lumber market may be shallow depending on the persistence of this demand. Ultimately, and I know this is an unsatisfying response, it will just take time for markets to get back to equilibrium. While it may be frustrating if you are using lumber as an input, markets will eventually correct and prices will not be “unprecedented” indefinitely.
*This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. No strategy assures success or protects against loss. Investing involves risk including loss of principal.*
About the Author:
Kevin W. Meyer is a Financial Advisor at John Bailey Financial.
You can learn more about Kevin here: https://www.johnbaileyfinancial.com/team/kevin-w-meyer
and contact him at kmeyer@johnbaileyfinancial.com
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