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Boston Real Estate News: What will it take for lumber prices to come down?

Call it a woodpile up. Lumber dealers are seeing inventory stack up just months after a shortage sent prices skyrocketing.

A survey from John Burns Real Estate Consulting revealed that 49 percent of lumber dealers and manufacturers in July had excess lumber capacity. Meanwhile, none reported inventories that were “very tight,” according to Bloomberg.

Both of those metrics represented a vast improvement for dealers and manufacturers compared to just a few months ago. In April, just 17 percent claimed to have excess inventory. That same month, over 40 percent claimed to be very tight in terms of inventory.

As a result, lumber prices have been all over the map. The market peaked in May as low inventory coincided with a surge in home building. Those prices have come down dramatically in the three months since, however, and lumber futures are now trading around 70 percent below the May peak.

The development is a boon for homebuilders — and buyers — who would benefit from the drop in lumber prices. Some builders have been forced to restrict sales as construction of homes failed to keep pace with demand.

Lumber is just one material, albeit an important one, in a vast construction ecosystem, though. Shortages among other inputs continue to impact builders.

Additionally, continued labor shortages and supply chain problems threaten to further increase the cost of constructing new homes.

[Bloomberg] — Holden Walter-Warner

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Boston Real Estate Blog News: Just Updated

Boston Real Estate News: What will it take for lumber prices to come down?

Lumber and plywood prices have jumped through the roof in the U.S. Building materials prices will retreat in 2022, returning to pre-pandemic levels by 2023. They reflect housing-specific issues, not general inflation. (The general inflation is coming, Forbes Magazine argued, but lumber is not an early sign.)

Why do Wood prices typically fluctuate?

Wood products prices typically fluctuate more than most goods, because home-building can move up or down much faster than sawmill capacity can. Wood products have other uses that are more stable, such as non-residential construction, crates, and pallets, but new housing is the largest usage, followed by home repairs and remodeling, and both of those activities are highly cyclical.

Wood is fairly abundant, in North America, especially in the southern forests. Modern mills are very efficient at turning logs into 2x4s and sheets of plywood. Lumber and plywood prices are so high now because of the short-run dynamics of demand and supply.

Wood demand shot up in the summer of a pandemic. Many homeowners were stuck at home, unable to vacation. With time and money on their hands, they headed to the local building supplies dealer for the materials to build decks, playhouses, she-sheds, and even additional rooms.

Low Real Estate Mortgage Rates

The low mortgage rates brought more buyers into the single-family real estate market. 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. With extremely low mortgage rates, purchases penciled out in 2020 and 2021.

Wood products companies would like to add capacity, but a new mill takes about two years to build. Before the pandemic, many new mills were being built as production shifted from Canada to the South. (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 2018 and 2019 led to long lead times for mill equipment. Thus, building a new mill today would probably take more than two years.

Producers are trying to increase the output of existing mills, but labor is a challenge for most of them. A few Covid-19 outbreaks among production workers have disrupted production. Mills also has difficulty hiring new workers. 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. On top of that, mills are usually located in rural communities that have been losing population. Finally, the stimulus checks and unemployment insurance bonus payments have sapped some people’s interest in taking jobs.

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 lumberyards. Truck drivers are in short supply across the economy. Glue shortages, caused by the storm-related shutdown of petrochemical plants in Texas, also lowered plywood production, but that’s a temporary problem.

These constraints mean that increased supply won’t bring prices down any time soon. It also explains why prices rose so sharply in the past year.

Lumber Prices Will Drop

Lumber and plywood prices will drop as demand falls. At some point, most of the people who can take advantage of low mortgage rates will already have bought a house. And interest rates will eventually rise. (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 that point, lumber and plywood sales will drop to more normal levels.

Boston Real Estate and the Bottom Line

Lumber and plywood prices typically rise in the spring and drop by the end of fall, by about five percent. This year look for not a decline but a leveling off. Prices will remain high for another two or three years, then drop back to more normal levels. The key to the pace of decline will be mortgage rates. In the meantime, homebuilders will pass the costs along to their buyers. The do-it-yourselfers will have a good excuse to postpone new projects. What better time to take a vacation?

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