From the sawmills, to the shelves of your favorite hardware store, lumber has been quite the celebrity this past year, as the price tag increased over 200%. The debate that has been flooding the internet is whether or not there was price gouging going on or was it simply a lack of inventory.
From the sawmills, to the shelves of your favorite hardware store, lumber has been quite the celebrity this past year, as the price tag increased over 200%. The debate that has been flooding the internet is whether or not there was price gouging going on or was it simply a lack of inventory due to the shut down of operations at the beginning of the pandemic and/or the demand simply increasing due to sellers getting sick of their homes during quarantine and having covid relief funds to make some changes.
I’m going to break down how and why this happened, as well as how this news will affect the future housing market.
Before I jump into the nitty gritty of this video, the only reason I mentioned the debate going on between price gouging and a lumber shortage is because my last video about the lumber shortage and inflation (which I will link in the description below) caused a stir of debates between people in the comment section, some being in the lumber industry.
I noticed that most of the comments weren’t leaning one way over the other. But in fact, the debate almost seemed as if it was down the middle or leaning one way to the slightest. After analyzing what each person had said, it’s clear the lumber situation wasn’t consistent in every single market. Yes, the prices increased to a certain extent, but other lumber yards had no lumber while others had stockpiles.
Some people said it was price gouging, other people blamed the DIYers, while others simply said it was a true lumber supply shortage. Let’s just say, at the end of the day, it’s nice to see headlines that read “lumber prices are falling fast.”
Lumber prices averaged $400 per thousand board feet between 2009 and 2019, but according to the wall street journal, July shipments of lumber were priced at $1,009.90 per thousand board feet, down nearly 41% from the record high $1,711.20 seen in early May. Some shipments were even seen to be lower than $1,000.
The lumber pricing service Random lengths, stated that its framing composite index which tracks on spot sales, dropped from $122 to $1,324, which was its biggest ever weekly decline. Random lengths said this came after a $124 rise in the first week of May. Sawmill managers had a tough time providing their customers with price quotes as the index dropped once again another $114 to $1,210.
Economists and investors everywhere wondered if this drastic increase in lumber prices would destroy the housing market, as builders raised their home prices and many of them simply stopped construction before the studs were put in. Which brings us to the question everyone is asking, what drove these lumber prices down?
Just like some people in the comment section were preaching on my other video, homebuilders and DIYers simply stopped purchasing lumber after seeing how outrageous the price tag has been month over month. That’s why it’s quite obvious why new construction of homes has been down 8.8% in May from the 14-year high in March.
When people are unwilling and unable to continue to buy something, it means it’s topped out and change needs to happen. What a lot of people don’t realize is there was a shortage of lumber before the pandemic even happened.
Inventory was down 33% and the surge of housing production increased demand 14% which created a drastic imbalance according to Business Insider. Federal reserve chair Jerome Powell stated on Wednesday that the falling of lumber prices further proves the central bank’s claim that inflation will be temporary.
On top of pre-pandemic shortages, commodities in general will spike when inflation increases, when copper and nickel prices begin to decrease, the concerns about lumber eased.
It’s supply and demand at its best, when you stop buying products while they’re still being made, the supply increases and the demand decreases. On a chart, this might seem like roles are starting to reverse, but in reality, it is a huge step in the right direction to reach equilibrium.
As the cash price of lumber (what the sawmills are charging distributors) adjusts, industry insiders said this number should be reflected on the price tags in your favorite big box stores.
According to the CME group, the world’s leading and more diverse derivatives marketplace, stated that lumber prices peaked in May and traders believe the retail prices will continue to descend with consistency. Economists said not to expect any quick changes, as this correction will take a little time to sort out as mills constitute to meet the existing demand while trying to dig themselves out of the inventory hole in 2020.
Even though new construction is down month over month, in a year over year perspective, new home construction in May was up 50% from May 2020 and up 21% from May 2019 according to fortune. With this news, you can guarantee builders are eager to get back to their projects and buy packages at these newer prices, which could keep prices descending at a slower rate as demand starts to increase as the prices start to drop.
According to Business Insider, experts said that lumber prices could drop to $600 per thousand board feet in the next 6 months. Chip Setzer who has actually been in the lumber industry for 12 years stated that having prices as high as $900 will create a very sustainable and healthy construction market, as well as harmony created for production and export.
Lumber is so incredibly prevalent in everyone’s life, that’s why so many people care about this series of events. My question for you before I wrap up this video is, do you think lumber will return to normal levels within the next 6 months? Or do you think they will be inflated for quite some time? Drop your thoughts in the comments below.
Cheers,
Andrew
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in White Lake, Michigan.