HOW WE GOT HERE?
- Timber used to build houses is imported from Canada to sawmills in the U.S., then milled into lumber and shipped to lumber yards across the country. These lumber yards contract with large homebuilders and/or bulk purchasers, typically 60-90 days in advance.
- Only a small number of domestic sawmills and lumber yards survived the 2008 housing crash and tariff hikes and had since significantly reduced inventory. When the pandemic hit, labor shortages cut production further and they sold all their inventory anticipating a similar shortage in demand.
- Conversely, the pandemic led to a significant housing boom, amplified by record low mortgage rates. This surge has driven up the cash price of lumber today, which in turn has increased the forward contracts at the lumber yards and initiated a pricing surge (reflected in the chart below).
- As lumber prices continue to rise, they have the potential to reach a tipping point, where affordability becomes unattainable, triggering demand to dramatically contract. With these concerns in mind, the National Association of Home Builders has requested that the Biden administration temporarily pause Canadian lumber tariffs, which currently sit at 9%.
NASDAQ LUMBER (LBS) CLOSE PRICE 2011-2021
Source: NASDAQ; CoStar Advisory Services as of May 24, 2021
Lumber priced today to be purchased seven months out (January 2022) costs approximately $1,000 per 1,000 bf. Alternatively, builders can sign a “futures contract” today agreeing to pay in January 2022 at the price marked daily, both potentially pricy options.
While many analysts believe the disparity between supply and demand will regulate over the coming year, the normalized market value of milled lumber may remain higher than normal for the foreseeable future, leaving developers bearing the brunt of lumber market volatility.
Sources: Eastdil Secured, Weekly Newsletter; Visual Capitalist, Visualizing the Recent Explosion in Lumber Prices, May 8, 2021; CoStar, Lumber Costs Raise Home Prices Further, May 2, 2021.
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