What The Rise And Fall Of Lumber Prices Tell Us About The Pandemic Economy

Jul 8, 2021
Originally published on July 8, 2021 12:23 pm

It's been a roller-coaster ride for lumber prices over the last year – and it's drawn outsize attention from the aisles of Home Depot to the Federal Reserve.

Lumber prices surged to record highs this year on the back of booming demand from homebuilders and do-it-yourselfers with plenty of time on their hands. The price surge was so big and sudden, it became a symbol of what some economists feared: rampant inflation.

But over the past two months, lumber prices have been dropping equally fast, giving weight to the central bank's argument that pandemic price spikes for many products are likely to be temporary.

That's not the end of the story, however. Lumber prices may have fallen, but they are still elevated, creating new headaches for the critical housing sector. And companies in the lumber industry are wrestling with a new pandemic problem: a shortage of workers.

Here are three things that the rise, fall and now volatility of lumber prices tell us about the pandemic economy.

Behind the great rise of lumber prices

The supply shock that sent lumber prices to record levels this year did not come from a shortage of trees: The price of raw timber has barely budged.

Instead, the lumber crunch was centered on sawmills, which cut round timber into square boards.

"You can think of us as the grain mill in the ecosystem of the timber industry," says Ross Stock, a third-generation sawmill operator who runs Western Cascade Industries in Toledo, Ore.

In the early months of the pandemic, many sawmills shut down, both for health reasons and because they assumed demand for lumber would plummet.

Instead, demand took off. Stuck at home, Americans in large numbers began adding decks, repairing fences and even building treehouses.

A worker in Spanish Fork, Utah, assembles a truss for a home in May. Economists saw the surge in lumber prices as another example of potentially rampant inflation. Instead, prices fell.
George Frey / Getty Images

Professional homebuilders also got busy, as rock-bottom interest rates and a desire for more space pushed demand for housing into high gear.

According to the National Association of Home Builders, single-family home construction jumped 12% last year, and remodeling activity climbed 7%. Meanwhile, domestic sawmill output rose just 3.3%.

As a result, lumber prices soared — from $349 per thousand board feet in April 2020 to $1,514 this May, according to the trade journal Fastmarkets Random Lengths.

"It was absolutely an astonishing run," Stock says.

That run in lumber prices sparked concerns about inflation as prices across a range of goods similarly jumped.

And then there was the great fall ...

Since lumber prices peaked in May, however, demand has cooled sharply.

With vaccines rolling out and the impact from the pandemic easing, do-it-yourselfers have found other ways to spend their weekends.

"People are stuck at home less. They can go out and travel more. They can go out to restaurants and bars," says Dustin Jalbert, a Fastmarket economist who follows the lumber industry. "In the home centers like Home Depot, Lowe's, the wood volumes going through there have slowed substantially, especially for items like decking and fencing."

Professional homebuilders are also tapping the brakes, in part because it's taking longer to get appliances and doors and other building materials.

Florida homebuilder Chuck Fowke ordered windows for a house he was building in November. They finally arrived six months later.

"You have builders who have building permits that aren't starting the houses," says Fowke, who's also the chairman of the National Association of Home Builders. "You have some that poured their slabs, and they haven't gone any further."

In the last two months, the composite price index compiled by Random Lengths has tumbled by 50% to $770 per thousand board feet.

Federal Reserve Chair Jerome Powell sees that drop as a good sign.

"Prices like that that have moved up really quickly because of shortages and the bottlenecks and the like, they should stop going up, and at some point in some cases, should actually go down," Powell told reporters in June. "And we did see that in the case of lumber."

Federal Reserve Chair Jerome Powell testifies at a House Coronavirus Subcommittee hearing in June. Talking to reporters last month, Powell mentioned the fall in lumber prices as a sign that some pandemic price spikes would prove transitory.
Graeme Jennings / Pool/Getty Images

But for lumber, that's still not the end of the story

Despite the recent drop in prices, lumber still costs about 80% more now than it did before the pandemic — a premium that builders say is adding tens of thousands of dollars to the price of a new home.

And the supply of lumber is still not growing very fast.

Sawmill operator Stock says building a new mill would cost tens of millions of dollars. He's trying to boost output at his current mill, but like other in-demand industries such as restaurants and hotels, he's now struggling to find workers.

"It takes time to improve a mill. It takes time to develop people," Stock says. "I've worked in sawmills since I was 8 years old. It's hard work."

Forecasters say lumber prices may have more room to fall. But price volatility creates its own headaches.

"The challenge right now for a builder is, if you're asked to give someone a price for a home, it's very difficult," says Fowke, the Florida homebuilder. "We're used to having prices change every six months or every 12 months. We're getting price changes every two weeks."

And even if two-by-fours are no longer propping up inflation, that doesn't mean prices will return to their pre-pandemic wood floor. So lumber may continue to capture headlines as yet another example of a product upended by the unprecedented pandemic.

"It's kind of like the price of gasoline," says Jalbert, the economist. "Lumber has been the sort of poster child for these supply shocks that we've seen."

Copyright 2021 NPR. To see more, visit https://www.npr.org.

LEILA FADEL, HOST:

Two-by-fours and other wood products have become a framing device for how we think about inflation during the pandemic. Booming demand from homebuilders and do-it-yourselfers sent the price of lumber to record highs earlier this year. But now the price is falling fast. And the Federal Reserve says that's a hopeful sign that other pandemic price spikes are also likely to be temporary.

NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: It's been a roller coaster ride for lumber prices over the last year, a rickety wooden roller coaster. And in a market that's usually pretty stable, that's drawn a lot of attention - from the aisles of Home Depot to the central bank.

Economist Dustin Jalbert tracks the lumber business for Fastmarkets.

DUSTIN JALBERT: It's kind of like the price of gasoline, right? You have a lot of weekend warriors that are doing projects around the home. And they see the price of a stud. And it's noticeable, right? Lumber has been this sort of poster child for these supply shocks that we've seen.

HORSLEY: The supply shock in this case has nothing to do with logs. There are plenty of trees in the U.S. And the price of raw timber has barely budged. The bottleneck that sent lumber prices soaring was sawmills.

ROSS STOCK: You could think of us as the grain mill in the ecosystem of the timber (laughter) industry.

HORSLEY: Ross Stock runs the Western Cascade sawmill in Toledo, Ore. He's spent decades sawing round timber into square boards.

STOCK: I'm a third-generation sawmiller. My grandfather started sawmilling in the post-war era.

HORSLEY: In the early months of the pandemic, a lot of mills shut down, both for health reasons and because they assumed demand for lumber would dry up. But then a funny thing happened.

(SOUNDBITE OF SAW WHIRRING)

HORSLEY: Stuck at home, Americans in large numbers started adding decks, repairing fences, even building treehouses. Professional homebuilders also got busy as rock bottom interest rates and a desire for more space pushed demand for housing into high gear. Sawmills struggled to keep up with the unexpected surge in orders. And over the next year, lumber prices quadrupled.

Now, though, Fastmarkets' Jalbert says, demand is cooling off. For one thing, do-it-yourselfers have found other ways to spend their weekends.

JALBERT: People are stuck at home less. They can go out and travel more. They can go out to restaurants and bars. In the home centers like Home Depot, Lowe's, the wood volumes going through there have slowed substantially, especially for items like decking, fencing.

HORSLEY: Professional homebuilders are also tapping the brakes, in part because it's taking longer to get appliances and doors and other building materials.

Florida homebuilder Chuck Fowke ordered windows for a house he was building last November. They finally arrived six months later.

CHUCK FOWKE: You have some builders that have building permits that are starting the houses. You have some that poured their slabs, and they haven't gone any further.

HORSLEY: So demand for lumber is easing. Supply is slowly picking up. And as a result, lumber prices are getting hammered. Prices have tumbled nearly 50% in the last two months.

Federal Reserve Chairman Jerome Powell sees that as a good sign.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: Prices like that that have moved up really quickly because of shortages and bottlenecks and the like, they should stop going up and at some point, in some cases should actually go down. And we did see that in the case of lumber.

HORSLEY: Even with the recent drop in prices, though, lumber still costs about 80% more now than it did before the pandemic, a premium that builders say is adding tens of thousands of dollars to the price of a new home. And the supply of lumber is still not growing very fast.

Ross Stock says building a new sawmill would cost tens of millions of dollars. He's trying to boost output at his current mill but says it's a struggle to find enough workers.

STOCK: It takes time to improve a mill. It takes time to develop people. I worked in sawmills since I was 8 years old. It's hard work.

HORSLEY: Forecasters say lumber prices may have more room to fall, which would be a relief for builders.

But Fowke, who chairs the National Association of Home Builders, says price volatility creates its own headaches.

FOWKE: The challenge right now for a builder is, if you're asked to give someone a price for a home, it's very difficult to give them a price right now because we're used to having price changes, you know, maybe six months or every 12 months. We're getting price changes now every two weeks.

HORSLEY: And even if two-by-fours are no longer propping up inflation, that doesn't mean prices will return to their pre-pandemic wood floor.

Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.