Over the past year, the construction industry has been buffeted by many factors due to the fallout from the spread of the coronavirus. One area that has proved particularly troublesome is the rapid increase in prices for construction materials. One specific item—lumber—is notable for its sharp increase in price that has remained high for a prolonged period.

For many building materials there have been disruptions to the supply chain due to COVID-19, which has slowed delivery, created shortages, and led to higher prices. This has been the case for lumber. The major impact of disruptions in lumber supply and the resulting higher prices has fallen especially hard on residential construction. In particular, single-family construction, which uses a significant amount of lumber, has felt the sting, adding significantly to the cost of construction.

As recently as March 2021, the National Association of Home Builders (NAHB) estimated that the rise in lumber prices has added roughly $24,000 to the cost of the average new single-family home. Based on NAHB's model that estimates the impact of a thousand dollar increase in the price of a new home on the ability of the median household to afford the median priced home, over 3.6 million households were priced out of the market by the rise in lumber prices.

Shifts in both supply and demand due to the coronavirus are the source of these problems. This has been most notable with softwood lumber. Early on, when the spread of the coronavirus was just starting in North America, suppliers reduced output due to a combination of fewer employees at work due to illness, restrictions on operations imposed by local authorities, practices instituted to limit employee potential exposure to the coronavirus, and an expectation that demand for lumber would fall.

On the demand side, demand for lumber used in construction of new building projects did fall, but demand for lumber for various additions/addons/renovations (e.g., porches, decks, home office space) increased. This included demand for DIY projects. In general, the lumber used in these projects is of a different size from the lumber used by builders for new home construction. Thus, suppliers were caught short, sending softwood lumber prices soaring. From February 2020 to March 2021, the producer price index for softwood lumber prices jumped 92%.

Normally, these huge price increases would lead to increased supply and reduced demand. To some extent, both have happened, but the ability to increase supply is limited by a few factors. First, the mountain pine beetle, which infested forests in north-western U.S. and western Canada starting roughly around 1996, destroyed many of the trees used for lumber in construction. Early on in the infestation, loggers felled many of the infected trees to salvage them for usable lumber. However, this meant cutting trees that would normally be left to grow for future use. As a result, current availability of trees of the right size has been greatly reduced.

Second, fires in the West (again in the U.S. and Canada) have both reduced supply of lumber and made it more difficult to harvest usable lumber. The devastating fires are a result of climate change (hotter weather and less precipitation), poor forest management (reducing fires and prescribed burns for decades), and the result of the spread of the mountain pine beetle, which makes infested trees more susceptible to fire. The fires also destroyed some of the equipment used to harvest trees and to turn them into usable lumber.

Third, the continued spread of the coronavirus reduced the number of available workers. However, as vaccine distribution is ramping up and more workers are vaccinated, this problem will eventually disappear.

On the positive side, the Trump administration lowered the tariff on Canadian lumber from 20% to 9% in December 2020. Builders have called for the complete elimination of the tariff.

Meanwhile, low interest rates, working from home, and remote learning continue to support demand for additions and renovations aimed at increasing available space or making better use of existing space, most of which are lumber intensive, supporting demand for lumber despite higher prices. For homeowners who did not suffer a significant loss in income, forced savings due to pandemic restrictions limiting spending on travel, entertainment, and restaurants have given them the funds for these projects.

Lumber prices will remain elevated for several months. However, the return of vaccinated workers to lumber production from forest to final product will increase supply. Supply chains will improve. Delivery times will eventually shorten, returning to some semblance of normal (i.e., pre-pandemic delivery times). As the economy adjusts to a post pandemic world with schools reopening and many workers returning to the office, demand for these lumber-intensive projects will ebb. The net effect will be the eventual decline in lumber prices, though not to their pre-pandemic levels.

Bernard Markstein, Senior Advisor | markstein@econsultsolutions.com

Bernard M. Markstein is President and Chief Economist, Markstein Advisors, an economic consulting company providing analysis and forecasts of the national economy and construction activity. Dr. Markstein's experience includes analysis and research in housing, residential and nonresidential construction, real estate, financial markets, macroeconomic issues, and regional markets.