Lumber prices at the time of this writing are less than $500 per thousand board feet. Prices generally live in the range of $200 to $600. So, today's prices are within reason. This makes it astounding that during the pandemic we saw the cost of lumber top $1,700.
But how did prices drop so rapidly during 2022? Let's examine both the domestic and international factors that have resulted in the return to the traditional price range.
Supply Chain: Sawmills and The Russian Invasion of Ukraine
The pandemic complicated the supply chain for the lumber industry. Sawmill owners complying with COVID-19 restrictions shut down or shrunk their workforce. Further interruptions came from natural disasters in North America, such as historic-sized forest fires and floods.
These events disrupted the typical seasonal pattern of lumber production. Cyclically, activities slowed in anticipation of cold weather and then sped up in time for increased construction during the warm months.
But unprecedented world events and disasters rearranged the industry for two years. However, once the world health crisis improved and natural disasters passed, the sawmills began ratcheting up their production.
Their small output had been the major contributing factor to the rise in lumber prices. Correspondingly, their return to close-to-normal production schedules helped bring lumber prices back down.
Sawmill activity domestically and from non-Russian allied countries has helped offset the effect that otherwise the Russian invasion of Ukraine would continue to have.
One of the ways nations found to punish Russia for launching a war is the use of sanctions. So countries against the invasion blocked the import of lumber coming from Russia and its allies, such as Belarus. Russian-dominated countries before the war exported more than 10% of the world's lumber.
On March 2, 2022, European Union published its decision regarding the import of lumber from Belarus. According to its conclusion, it's illegal to bring any wood products traceable to Belarus into an EU country. This includes purchasing lumber from a third party, such as a non-EU country that had obtained the lumber from Belarus.
U.S. Rail Disaster Averted
A North American rail strike loomed large over the economy during December. But the White House managed to oversee a deal that averted disaster at the 11th hour.
The assurance of freight trains making their deliveries on time has helped keep current lumber prices where they are. A strike would have disrupted the supply chain and propelled prices upward once again.
The pandemic motivated people to fast forward their goals for home ownership. It didn't matter that the shortage of lumber had boosted the typical one-family home by more than $18,000.
Despite the price of lumber, home builders tried to take advantage of the steady flow of city residents looking for suburban housing. But homes built by real estate companies on the assumption that families would soon fill them met with disappointment.
Why? The interest rate climbed from just above 0% to more than 4% during 2022. The rise in interest rates means that families that prior to the pandemic could afford the necessary mortgage loan can't do so now. The 30-year mortgage rates are the highest since 2001.
That explains why November 2022 was the 11th month in a row that homebuilder confidence dropped. Many would-be homebuyers are delaying their purchases and turning to the rental market.
The U.S. government increased interest rates to slow down spending in an effort to slow inflation which had reached levels not seen in over 30 years. Interest rate hikes have historically been successful in pumping the brakes on home buying. This time has been no exception.
On December 12, lumber prices reached their lowest mark since June 2020 at $382.80 per thousand board feet. The falling demand for lumber reflects the decline in home sales. October 2022 was the ninth consecutive month of decline.
The U.S. Federal Reserve announced on December 14 its seventh interest rate hike of 2022. And Federal Reserve Chairman Jerome Powell cautioned that he will likely employ more interest rate hikes in 2023 to ensure that inflation doesn't become a permanent part of the economy. Most Fed officials think the interest rate will eventually have to top 5%.
During the height of the pandemic, many do-it-yourselfers took advantage of the time on their hands to tackle projects around the house. It's not surprising that DIYers would remodel and expand, but few predicted they would do so while lumber prices were climbing.
Their diligence helped deplete the stock of local retail stores. In turn, the stores' demand to fill a need added to the upward pressure on prices.
But what happened as the pandemic eased and those DIYers returned to their regular jobs? As their free time disappeared, so did their need for lumber. Retail suppliers now had more stock on hand just as lumber prices began falling.
Will Prices Reach Pre-Pandemic Lows?
Naturally, there's nostalgia for the days of relatively inexpensive lumber. But there are indications of the challenges of ever returning to those levels.
For starters, timberland owners and lumber production facilities operate differently today. They're now more likely to exercise greater control of supply to match demand. In the past, supply could often outstrip demand, bringing down prices.
The price of specialty woods also indicates caution. It's cheaper now to frame a house than during the pandemic because it much cheaper now to buy bulk lumber used in general home construction.
However, prices are still at a premium for specialty products such as shiplap. Industry experts expect prices to stabilize and then come down like general-purpose lumber but at a slower rate.
Stay Alert to Influences on Lumber Prices
No one foresaw the roller coaster ride lumber prices would experience over the past few years. However, the pandemic did teach us to be alert to early signals of supply chain disruption.
Yes, it can be a struggle to remain alert to changes in today's fast-changing economy. But you can make informed decisions for your company by being a regular reader of our website.
Contact us today to discuss your next lumber purchase.
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