Since the COVID pandemic began, multifamily developers and builders have had to try and budget for their lumber needs. After months of wild fluctuations, lumber futures fell to their lowest level in a year earlier this month according to lumber price data from NASDAQ. They have since reversed course, and currently stand at just under $600.
This drop followed two pandemic-era price bubbles in the market, where lumber futures rose to record highs in the thousands of dollars before dropping below $500.
Construction Dive states that the producer price index for softwood lumber fell 22.6% in June 2022 alone, and 35.0% overall between March and July 2022, according to a report by senior NAHB economist David Logan.
This is extremely unusual since in the entire history of the U.S. bureau of Statistics' softwood lumber producer price index, which goes back to 1947, prices have never exhibited more than 10% volatility in a given month until early 2020, when the cost of lumber spiked 20%. Since then, the high ends of price volatility have ranged from 25% to 30%.
David Logan told Multifamily Drive that this shift stems from the ongoing impact of the COVID pandemic on the lumber industry, starting with sawmill closures in March and April 2020. He stated that a good portion of those production cutbacks continued through July and August of 2020.
This came at the same time when there was a boom in housing demand which was something the lumber industry did not expect according to Logan.
"They didn't want to be sitting on huge inventories of lumber, so that is what initially caused the large upswing in prices in 2020. Housing activity remained extremely robust through 2021, but U.S. producers were putting out the same amount of output as they had been the prior year."
Senior NAHB Economist | David Logan
As the price of most materials has been rising, lumber costs have moved against the grain of inflation, according to the National Multifamily Housing Council's Construction Quarterly Survey for the second quarter of 2022.
Very few survey respondents made design changes or turned to alternative products, materials and suppliers. Almost half - 48% - had changed their purchasing and warehousing schedules as a buffer against future price shifts. Thirty-seven percent had taken no action at all which was a jump up from 18% the previous quarter.
These depressed lumber prices compared to the last two years could stem from the impact of inflation on industries that depend on lumber, according to Paula Cino, Vice president of construction, development and land use policy at NMHC.
"This could very well be part of the inflationary story. As we see interest rates rise and costs go up, that is actually putting downward pressure on housing as well as other big purchases and renovation potential. So that is causing some of the volatility in the lumber space, even though we see prices escalating elsewhere."
Vice President of Construction, Development & Land at NMHC | Paula Cino
Even despite the negative impacts of lumber prices, Cino sees the multifamily construction space as being strong, and that the NMHC remains optimistic despite an unknown future.
AZ Big Media reports that Tim Morris, associate broker with HomeSmart and former homebuilder states that the biggest factor really comes down to prices going up because they can. There's more demand than supply. He adds that another issue that affected the supply involved the United States' neighbor to the north. Canada's lumber industry is subsidized by the government, meaning that Canadian companies can sell their product cheaper than their U.S. competitors. In retaliation, the U.S. government instituted antidumping rules that put tariffs on Canadian lumber when it crosses the border, which disincentivized trade between the two counties, though it still occurs.
Morris explains that lumber prices have started to slide downwards, but it's going to take time for the end user to see those savings. It's like gasoline at the pump. People hear about a pipeline breaking and gas at the pump goes up 50 cents per gallon. Then we find out it really didn't break, but it takes two months for it to finally get back down to where it was.
A decrease in demand or increase of supply will need to continue for some time before price reductions happen further down the pipeline.