Hope all is well and you are enjoying some semblance of return to normalcy with California reopening. For a great primer on what that means, the Mercury News put out a helpful FAQ.
From a macro perspective we’ve seen home prices continue to hold with the greatest increases in the single family home market. Many clients/friends have asked if this rise in housing prices can be sustained. For an answer, we thought it might be useful to look at the costs to build. The thought being that the more that costs for home building rise, the more new homes and existing homes cost.
Anecdotally, many have head that lumber prices have gone up during the pandemic (along with rental cars, boba, toilet paper, and microchips). Over the past year, the price of lumber in the US has gone up by as much as 377%.
Wood that typically sells for $200-$300 per 1k feet hit nearly $1.7k in early May. This jump adds ~10% to the average price of a new single-family home in the bay area.
Reasons for Lumber Increases
Problems in the lumber market started long before the pandemic as the years following the Great Recession (2007-2009) led to a dramatic decrease in home building as new housing starts ground to a halt.
As a result, US lumber demand plummeted by 49% and 30+ large sawmills went out of business. At the same time, Canada, which typically provides 1/3 of the US lumber supply was hit by the perfect storm of unfortunate events including an infestation of bark-eating beetles killing 60% of British Columbia’s salable pine and wildfires in 2017 and 2018 destroying another 6.2m acres of would-be lumber.
When the pandemic struck in 2020, many initially assumed that the housing pullback of the Great Recession would repeat itself. By April 2020, sawmill operators had cut back output capacity by 40%. However, something strange happened, demand for lumber didn’t go down but went up!
Record low home interest rates, stimulus cash, and more time at home led to a boom in remodels and new construction ratcheting up lumber demand.
Although no one is sure how long the lumber shortage may last, lumber futures are showing a downward trend as high lumber prices have turned normal business lumber buyers into sellers and factories scramble to ramp up production.
Hope you and your loved ones are managing well and as always, feel free to contact us with any questions, real estate related or otherwise.