Record lumber costs add $35K to home prices
With housing demand pushing lumber prices to more than double what 2x4s cost a year ago, workers at the Allweather Wood manufacturing plant in Loveland are treating lumber as fast as possible.
But they’ve run into issues aggravated by the coronavirus pandemic. Not all employees returned to work after a brief closure last year. Staffing is down nearly 20% compared with pre-pandemic levels of 44 people. The company has several entry-level positions open, which start at $18 an hour, provide training and include a $1,000 bonus.
“We’re running at full capacity, but we are short labor and that’s putting a lot of pressure on our crews,” said J Gonzales, director of sales and distribution for Allweather Wood/Humboldt Redwood. “It’s kind of a cyclical thing, but since the pandemic, it seems to have gotten worse. It’s almost the norm now where we’re always looking for workers that want to get into the construction business.”
The labor shortage, an issue before the pandemic, is among a number of contributing factors to the 200% and higher spike in lumber prices, industry watchers say. After a pause caused by the first COVID-19 stay-at-home orders, the construction industry was deemed essential, got back to work and faced an unexpected surge in demand for new houses and home renovations. The inability to provide enough lumber has increased the average price of a new single family home by more than $35,000, the National Association of Homebuilders said Wednesday.
Back in April 2020, builders paid $16,927 for the lumber and manufactured lumber products used to build a single-family home. Now that cost is $48,136. Add in interest and fees and NAHB calculates that the lumber price hike has added $35,872 to the cost of building a house in the past year. In a recent NAHB survey, 47% of single-family builders surveyed said they were including price escalation clauses in their sales contracts.
“Rising prices are due to strong housing construction related demand (new single-family and remodeling), as well as factors that have limited the amount of sawmill production that has taken place, which include labor issues and broader supply-chain issues,” said NAHB Chief Economist Robert Dietz in an email. “Costs are rising for almost all materials used in residential construction for similar reasons, although lumber is one of the more notable items.”
Uncontrolled and existing issues collide
Just as with most industries, restarting after COVID hit wasn’t easy. Sawmills had temporarily shut down, including Humboldt Redwood Sawmill, a sister company of Allweather Wood. The supply chain stuttered. Not all the workers felt safe returning to their jobs that were deemed essential. The lumber industry lost a few valuable weeks, said Sam Patti, vice president of California sales for Allweather Wood, which is headquartered in Washington state.
“You don’t get that back,” said Patti, who is from Pueblo. “It’s like the airlines. A plane takes off and lands, you don’t get to sell that seat again. You’ve lost all this production and you’re trying to catch up, but you can’t because everything stopped getting harvested, stopped getting hauled. Mills didn’t take in raw material.”
According to industry trade publication Random Lengths, lumber prices have increased 240% from a year ago. As of Friday, the overall average price of lumber was $1,188 per thousand board feet, compared with $349 a year ago. This is the price the mills pay. The price is usually much higher by the time it ends up with homebuilders or in a shopper’s cart at Home Depot, said Shawn Church, editor of Random Lengths.
“The lockdowns hit and we had a five-week period of prices plunging just because everybody backed off,” Church said.
That didn’t last. People stuck at home began renovation projects or, spurred by low-interest rates, jumped into the housing market. Demand for single-family homes continues to push home prices higher. In Colorado, the median sales price in March jumped as much as 10.3% on the Eastern Plains and 23.3% on the Western Slope from a year ago.
Building permits for new single-family homes were at 1.76 million in March, up 30.2% from a year ago, according to the U.S. Census data.
“This just ignited this huge demand for single-family housing. And we’re right back up there,” Church said. “Those are the levels we were at when we went into the Great Recession for the housing crisis.”
As previously planned, new mills did open in the past year, mostly in the South, where production increased about 7% compared with 2019. The South is also expecting three to four more mills to come online in the next two years, according to Random Lengths. But that’s not happening in other key lumber producing regions, such as the Pacific Northwest, which was flat, and Western Canada, down 4% as pine-beetle devastation whittled away logs.
“In 2020, the southern pine region was able to increase production by about 7% and this offset the decline in Western Canada (and) flattened production levels in the Pacific Northwest to give it about a 2% overall increase,” Church said. “But that 2% increase is just inadequate, really, to meet this level of demand.”
Not just lumber
Denver-based Tuff Shed had one of its best years ever last year as homeowners stayed home and ordered sheds for a backyard office, gym or just a good ol’ shed. Sales were up 30.8% “and this is not a new company,” said Phil Worth, vice president of marketing for the company, which turns 40 this year.
But as lumber prices and other materials ratcheted up, the company initiated low single digit price increases twice in the past six months — something it typically does only once every two years. It also did away with discounts.
It’s not just rising lumber prices, though. Other items like sheet goods used in siding and floor and roof decking are up 400% in the past 16 months. Prices for steel, used in Tuff Shed’s hardware, is up 160% since August, Worth said.
“We probably have around 300 different (items) and in any given year, there’s going to be upwards pricing pressure or scarcity on a few of those,” he said. “What’s unique about this last year is that something like 90% … were getting upward pressure from pricing.”
He laid out the demand “triple whammy:” Mills closed for several weeks, consumer demand increased exponentially, and the record-setting fire and hurricane seasons on the West Coast and Gulf created demand for new construction, not to mention one of the most destructive wildfires in Oregon’s history.
“Not a lot of people talk about this, but while those fires were burning, they were not operating at capacity or at all out there,” he said. “It’s really been eye opening how many factors have been at play in the last year.”
Prices expected to come down again
Tuff Shed’s 2021 sales so far are well above expectations set at the start of the year. It had budgeted for 24% revenue growth in March, but sales grew 75%, making it “our highest single revenue month in our 40-year history,” Worth said. March 2020 sales were not great, he said, because of the shutdowns.
He suspects the price of materials will come down again. Because they always do.
“We haven’t really seen that yet, but it’s likely that we’re going to see some relief at some point,” he said. “I don’t think it’s sustainable to have prices this high.”
Even companies like Home Depot, which had a record year in 2020, don’t want to be too optimistic about this year. The home-improvement retailer declined to offer a forecast for investors at its last earnings call in February.
“As we look ahead to fiscal 2021, while we are not able to predict how consumer spending will evolve, if the demand environment during the back half of fiscal 2020 were to persist through fiscal 2021, it would imply flat to slightly positive comparable sales growth and operating margin of at least 14%,” Richard McPhail, executive vice president and CFO, said in a statement at the time.
Industry watcher Church, at Random Lengths, also suspects homeowners will be less enthralled to tackle backyard projects or invest in additional improvements in their homes this year. He’s been covering the lumber industry for 30 years and “these runs do have an end and there is a correction.”
Of course, he doesn’t know exactly when that will be. But he is forecasting a decline in lumber demand for home improvement this year.
“Once you build a fence or build a deck or renovate your home, you’re done,” Church said. “There’s not much more need to do it again for another 20 years.”
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