While many factors have contributed to surging real estate demand over the past year, lumber costs have been at the forefront.
There’s a reason for it. Not only did COVID-19 disrupt supply and production chains, but demand increased, too. On one hand, demand for new construction rose in the face of lacking existing inventory. On the other hand, cooped up, quarantined Americans were investing their stimulus money on DIY home projects.
Factories closed during quarantine while housing demand jumped to record highs. Sawmills shut down not necessarily because of COVID, but because they expected a housing slump. The market did the exact opposite.
Regardless of why lumber demand rose so high, it ultimately tacked on an average of $36,000 to new construction. Keep in mind, too — the construction sector has been lagging behind demand since the Great Recession. It’s been a constant feature of the modern housing market and a large reason why supply has yet to catch up to demand.
On top of already inflated home prices due to high demand and low supply, this added cost only served to push first-time homebuyers out of the market. Price appreciation — even rapid appreciation — isn’t necessarily a bad thing.
Paired with the COVID-19 recession, however, prices have proved to be troublesome for the real estate market. Even record-low mortgage rates only incentivized buyers for so long. Even with low rates, the cost of a mortgage was too much to bear for many Americans.
Thankfully, it seems as though balance is ready to come back to the market.
Falling Lumber Costs
One of the biggest fears surrounding government stimulus efforts is the potential for inflation. It seems as though hiked prices across the board are finally ready to come down as the economy reopens. In the end, it’s easing fears of an inflation-fueled economic crisis.
Lumber prices are finally falling, though they’re still high above pre-pandemic levels. Let’s look at the numbers.
Cost of Lumber Futures
Why Are Prices Dropping?
Lumber prices have been on the decline for a few reasons:
Forbes quoted Sherwood Lumber Chief Operating Officer Kyle Little, “When you have over a 400% price move in about a 15-month period of time, the volatility involved with that will lead to price adjustments like we are experiencing right now.”
Because prices have grown so rapidly, demand has shrunk. Households have been increasingly priced out of the homebuying market, leading to the slowing of price gains. This trickles down into demand for lumber, too.
The reopening of sawmills and other lumber-related industries has allowed supply to better meet demand after months of limited or stalled production. A returning sense of normalcy as a whole has caused the demand for DIY projects to drop, as households would rather spend their money on activities they’ve been unable to engage in for the better part of a year. They’re going out again rather than constructing an addition.
The Supply/Demand Breaking Point
In any market, a tight supply with high demand means rising prices. This isn’t something that can go on forever, though. Eventually, the price of goods and services will drive demand down by pricing out prospective buyers.
That’s just the nature of the game. Demand will stall when prices grow too exorbitant.
Of course, falling lumber prices do not mean that the real estate market is out of the woods. Inflation is present in different sectors, and although lumber costs contributed to the current state of the real estate market, the market is likely to continue fluctuating. As home prices inflate, rent prices follow and will continue to follow.
As discouraged homebuyers give up on the real estate market, they need an alternative. That increases rent prices.
Are We Headed Towards an Inflation Crisis?
The New York Times points to the process of inflation that is equal parts economic and psychological, saying “When inflationary expectations take hold, people become convinced that prices are on a never-ending escalator. They rush to buy now, at any price, and increases become a self-fulfilling prophecy.”
That doesn’t seem to be the current state of affairs. Although inflation is certainly present, we’re not on a runaway train. Prices in different sectors and among commodities are leveling off and dropping as the economy returns to a sense of normalcy.
Keep an eye on the housing market, but don’t expect prices to soar forever.
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