Falling lumber prices are good news for construction... and the economy

By Jenny LescohierJuly 06, 2021

The price of lumber dropped 40% in June after an unprecedented year-long rally

Lumber futures dropped 40% in June after prices hit an all-time high of $1,670.50 per thousand board feet on May 7, calming fears that ‘70s-style inflation will threaten the nation’s economic recovery from the ravages of the pandemic.

It also means there could be some relief for contractors who’ve seen their materials costs skyrocket over the past year with no way to bring their prices up to match.

The cost of goods and services used in construction climbed by a record-setting 4.3% in May and 24.3% over the past 12 months, jeopardizing contractors’ solvency and construction workers’ employment, according to an analysis of government data by the Associated General Contractors of America (AGC)

“The increase in producer prices for construction materials over the past year far outstrips contractors’ ability to charge more for projects,” said Ken Simonson, the association’s chief economist. “That gap means contractors are being hit with huge costs that they did not anticipate and cannot pass on.”

The 24.3% increase in prices for materials used in construction from May 2020 to last month was nearly twice as great as in any previous year, Simonson said. Meanwhile, the producer price index for new nonresidential construction (a measure of what contractors say they would charge to erect five types of nonresidential buildings) rose only 2.8% over the past 12 months, as contractors held their profit expectations down in order to compete for a limited number of new projects.

Fortunately for contractors, lumber prices are seeing a correction now that supply has increased and homebuilding demand has eased. In June, lumber futures suffered their worst month on record since 1978 and are now down more than 18% in 2021 and might see their first negative first half since 2015.

But prices are still more than six times higher than their pandemic low in April 2020, according to reports, and the National Association of Home Builders (NAHB) stated their steady rise over the past year has caused the price of a newly constructed home to increase by an average of $36,000.

Why are lumber prices falling now?

Following the law of supply and demand, the recent drop in lumber prices over the past few weeks is said to be a result of a surge in production at U.S. sawmills that attempted to capitalize on the sale of wood at historically high prices. As supply increased, speculative trading cooled and prices began to fall. 

Prices have now slipped below $1,000 for the first time in months, currently sitting at $710 per thousand board feet. This price is still relatively high compared to $400 per thousand board feet seen between 2009 and 2019.

The sky-high cost of lumber over the past year had a dampening effect on homeowners’ do-it-yourself aspirations. With the U.S. economic reopening picking up steam, consumers have begun to forego renovation and building projects in favor of travel and other purchases. 

Now, lumber futures prices are on track for their sixth consecutive weekly loss, negating their 2021 rally, CNBC reported

Lumber prices and inflation

In addition to what lower lumber prices mean to contractors and the construction market, experts say the trend is promising for the U.S. economy. The fear of encroaching inflation has been discussed at length by economists analyzing the nation’s near- and long-term economic future in the wake of Covid-19.

“This drop suggests that the cause of that inflation - the mismatch of supply and demand - will not last forever,” Brad McMillan, CIO at Commonwealth Financial Network was quoted. “As suppliers accoss industries get their acts together, those shortages will fade, along with the inflation. That looks to be happening for lumber now and will happen for other inputs later.”

“Nobody’s not running capacity right now,” Joe Hankins, sales manager at Hankins Lumber, a sawmill and timber company in the north-central Mississippi town of Grenada told the New York Times.

Meanwhile, the professional homebuilding industry, the largest source of demand for lumber, is slowing from a breakneck pace, with some builders citing high prices for wood as a reason to hold off on construction.

Those decisions are one reason some analysts think the recent rise in inflation is the result of temporary mismatches in supply and demand, and not rampant price increases fueled by an excess of money pouring into the economy. They suggest the lumber market’s recent behavior is an encouraging sign that the market is correcting itself to reach a more sustainable state.

And end to tariffs and quotas?

Throughout the meteoric rise of lumber prices over the past year, particularly since President Joe Biden took office in January, AGC officials have urged the administration to move more quickly to end tariffs and quotas that are adding to construction materials costs and availability problems.

The producer price index for lumber and plywood more than doubled - rocketing 111% from May 2020 to last month, the AGC reported.

Association officials said the Biden administration can provide immediate relief from some of the price pressures by ending tariffs on Canadian lumber.

In related matters, AGC is asking the Biden administration to end tariffs and quotas on steel and aluminum from numerous countries, noting it took a first step to that end by announcing agreement on a working group with the European Union that will aim to end to tariffs on steel and aluminum from the EU by the end of 2021. 

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