July 8, 2021
The price of framing lumber has plunged about 50% over the last seven weeks, offering up a hopeful sign that skyrocketing building costs would ease. However, builders say that the prices they pay have only declined by a fraction of that percentage.
The disconnect in pricing has always existed in the lumber supply chain. It can still be a “long lag time” before the full price reductions come to builders, the National Association of Home Builders reports.
“As the price declines began grabbing headlines, the price of lumber packages quoted to builders held at record highs,” NAHB economist David Logan writes on the association’s blog, Eye on Housing. “This dynamic is primarily due to dealers’ inventory carrying costs and potentially large differences between the price at which inventory is bought and sold.”
The lumber supply chain consists of the following stages: from forest to sawmill to wholesaler to retailer to end user. The association offers up an explanatory reason prices are staying elevated at its Eye on Housing blog. Wholesalers and retailers have incentive to run through their existing inventory and recover what they paid for it—one of many factors that is currently keeping prices elevated for builders.
So, when will lower prices reach the builders and ultimately new-home buyers? The answer is unclear, but builders say more price drops in lumber may be needed. “Prices must fall for long enough to materially lower a supplier’s average costs after a run-up,” the association blog notes. “Depending on the rate and consistency of price decreases and whether prices have stabilized at the lower level, it may take a few weeks to a couple of months for builders to see price relief on the order initially reported in the futures or cash markets.”
Meanwhile, new-home building prices for home buyers continue to rise. In May, the median price of a newly built home was 18% higher than a year ago, at $374,400.
Source: “Why Builder Lumber Prices Remain Higher Than Headlines Suggest,” National Association of Home Builders’ Eye on Housing blog (July 6, 2021)