Skyrocketing Lumber Prices Threaten US Housing Market

With approvals finalized from the city of Lakeland, and the permitting for BRICS Contracting's new Lakeland apartment development "The Ovation at Lake Hunter" quickly approaching, we have been taking a long hard look at the housing and construction markets in the US and the effects COVID has had on them.

A usual focus of ours, is the "butterfly effect" and how everything has a trickle down effect in the Real Estate and Construction/Development industries. The butterfly effect is the theory that the sensitive dependence on initial conditions in which a small change or decision in one state of a system can result in large differences in a later state. In this article, which we hope will be both educational and insightful, we will be speaking from the standpoint of a Realtor and Developer and the challenges facing the business of each due to lumber pricing increases from the pandemic as well as the effect this has had on homebuyers, appraisers, and others.

Currently most Americans (especially Floridians) I think would say the housing market is booming and mortgage rates are at all time lows (this is correct in many ways for the resale market) however there are many more moving pieces that drastically affect these transactions that buyers, especially first time home buyers may not be aware of.

The recent spike in softwood lumber prices has caused the price of an average new single-family home to increase by $16,148 since April 17. Similarly, the market value of the average new multifamily home has increased by $6,107 over the same period due to the surge in lumber prices.

Softwood lumber is used throughout the construction of most new homes, including within its structural framing – beams, joists, headers, rafters and trusses – as well as in flooring and underlayment, interior walls and ceiling finishing, cabinets, doors, windows, roofing, siding and exterior features like garages, porches, decks, railing, fences and landscape walls.

Given the amount of wood used to build a new home, NAHB has estimated that the buyer’s price will increase by an additional 19.2%.

The median new-home price in June rose 5.6% to $329,000 compared to a year ago.

Since mid-April 2020, our estimating team at BRICS Contracting have watched the price of lumber increase more than 130%, reaching record highs. At the same time, prices for oriented strand board have increased over 138% over the past year. The increases, a result of lumber shortages, threaten housing affordability at a time when home prices are already at all-time highs.

The prices listed below provide an overview of the behaviors within the U.S. framing lumber pricing market. As you can see there is a drastic upward trend that is affecting many facets of the construction and appraisal process that we will go into further detail on.

The price of the home to the ultimate buyer has gone up even more, due to factors such as interest on construction loans, brokers’ fees, and margins required to attract capital to residential construction and get construction loans underwritten.

The primary drivers of the lumber price increase and supply chain problems include:

• Mills closed in the spring due to stay-at-home and social distancing measures enacted by state and local governments.
• When prices fell between March and April as a result of the COVID-19 pandemic, mills projected that housing would be adversely affected and therefore anticipated a large drop in demand. Due to this, mills that remained operational, substantially decreased their capacity.
• Producers did not anticipate the massive uptick in lumber demand from big box retailers as the stay at home mandates resulted in a remodeling frenzy as remodelers and do-it-yourselfers, were focused on addressing the improvements homeowners had been postponing for a later time. Suddenly their home took on a new dimension, where it became both a family and work environment, while also providing a safe haven. Kids were suddenly schooling from home, with college kids returning home to study from home as well.
• Housing weathered the storm much better than most anticipated.
• DIY demand has not abated much as states reopen and construction demand has far surpassed expectations.
• While we have all heard of the impact of tariffs, who could have thought the 20% tariff on Canadian lumber would put such a burden on housing.
• As fate would have it, we are also in the midst of the challenging hurricane season, where we are expecting more named storms than we have seen in years with greater risk to us all. For those of you that have not experienced the impact on pricing when we are threatened with landfall of a potentially powerful storm, check and see what happened to the price of plywood, OSB board and shingles. Not only does this put a premium on product, but also stretches the labor force, creating a similar imbalance of supply and demand.

The combination of all of these factors has created a change in the usual supply/demand curve. Suppliers continue to attempt to meet demand for the construction industry, but in some cases, contractors and trades are being forced to place orders without a locked price.

Tariffs Exacerbating Price Spikes

Another large factor to the increased cost on lumber has no doubt been exacerbated additionally by the lumber tariffs averaging more than 20% on Canadian imports into the U.S. market.

The NAHB has urged the White House to prioritize a new softwood lumber agreement with Canada, which would end tariffs averaging more than 20% on Canadian lumber shipments into the U.S.

“Housing affordability benefits from free trade,” said NAHB Chief Economist Robert Dietz. “To improve housing affordability, we really need to bend the cost curve, and that means finding ways to reduce construction costs.”

Appraisal Issues

These jumps in lumber costs nationwide are beginning to disrupt appraisals as well, one of the most integral steps in buying and financing a home. In the examples below, we will quickly see the domino affect of increased lumber pricing unfold.

Home buyers nationwide are starting to find themselves running into an issue caused by this increase in lumber pricing. As an example, when a house priced at $300,000 is appraised at $270,000, (based upon past sales of comparable homes without the increase in costs) the mortgage lender will only apply its underwriting ratios to the appraisal amount of $270,000, not the sales price.

To outline the threat skyrocketing lumber pricing poses a transaction, take this next example; a 90 percent LTV (loan to value) ratio on a $300,000 house permits a maximum mortgage of $270,000. If the same house appraises for only $280,000, however, the maximum mortgage drops to $252,000. The $18,000 additional to bring to the table for the down payment is a deal breaker for most buyers, especially first-time homebuyers. Buyers simply don't have the additional funds required. The builder cannot lower the price to accommodate the homebuyer as he must cover overhead and profit to stay in business. The banks do not want the appraiser to reflect current costs, as this simply increases the risk in the event of a correction. We cannot cover all the components here, but these examples very quickly show how the domino falls to affect the next piece in the puzzle and it is just a matter of who is going to eat the increased cost/catch the domino.

The issue here is like a double-sided sword. If appraisers follow the underwriting standards required by most lenders, they must look to the most recent completed sales of similar units nearby as their guide to current market value. On the flip side, if they try to add on higher component costs with no recent sales to support them, they could leave lenders exposed to future losses. Short-term fluctuations in material costs can't be given special weight by appraisers because materials prices could drop again, just as fast as they rose.

“Housing affordability benefits from free trade,” said NAHB Chief Economist Robert Dietz. “To improve housing affordability, we really need to bend the cost curve, and that means finding ways to reduce construction costs.”

Months ago all the experts we heard saw this pandemic as a show stopper and businesses cut production and staff accordingly to reduce expected losses. No one expected construction to keep going as it has, and while this is overall great news, it has brought its supply challenges with it.

In final thought, the BRICS team believes we are doing many things as a nation to support the economy as we all move forward that are immensely positive. We are all making changes and doing things that come from incredible challenges leading to incredible innovation. Whatever we face, we individually and as a nation must strive to do whatever it takes to rise above, to accomplish the seemingly impossible and do it together. However, we have to make sure we do not go blind at the wheel and ensure we all keep a finger on the pulse of our businesses and economy, and be cognizant how one decision we make may effect other facets.

Please let us know your thoughts?

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