A shortage of lumber and land is greatly driving up housing prices. Part of the problem is long-term population growth putting strain on limited natural resources. But the more immediate problem is due to a mismatch in supply and demand. The coronavirus pandemic and the economic shutdown that came along with it, combined with industry expectations that demand would not go back up anytime soon, have resulted in the current shortages. Keep in mind there is also the very real possibility rising housing prices could be an indicator of inflation. Soaring lumber prices add $36,000 to the cost of a new home, and a fierce land grab is only making it worse April 30, 2021 The surge in lumber prices in the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB. "We have seen, over the last four or five months, what I have never seen in my career before, is lumber to move to the level it has," said Sheryl Palmer, CEO of Taylor Morrison Home. New lot supply is down 20% from a year ago, according to Zonda. As the housing market gets leaner, potential buyers are turning in record numbers to new construction, but several factors are making those homes pricier than ever before. First is a major shift in the market’s composition due to the record shortage of existing homes available. About 1 in 4 homes for sale are now newly built, the highest share ever. Historically new homes make up about 1 in 10, but fierce buyer competition is behind that shift. Prices for new and existing homes are at record highs. But it is not just competition fueling prices for new homes. The cost of what goes into the home is adding to it as material and land prices surge. Lumber prices seem to set a new record almost daily, now up 67% this year and up 340% from a year ago, according to Random Lengths, a wood products industry tracking firm. And lumber doesn’t just go into framing a house. Those added costs hit cabinets, doors, windows and flooring. Lumber prices are skyrocketing for various reasons beyond just high demand from homebuilders and remodelers. Lumber tariffs had prices already rising a year ago, but then when the pandemic hit, production shut down. The expectation was that housing demand would dry up for a long time. But instead, after a brief pause, it came roaring back. Homebuilders were caught off guard, as were lumber producers. The price per single lot is up 11% this year compared last year, because demand is so high and supply is low. New lot supply is down 20% from a year ago, according to Zonda, a real estate data and advisory firm. "There’s a literal land grab going on as builders are scooping up lots," said Ali Wolf, chief economist with Zonda. "The lot supply shortage is real, and it is causing prices to rise and builders to move further into the suburbs." Soaring lumber prices add $36,000 to the cost of a new home (cnbc.com) The article goes on to criticize tariffs against importing lumber from other countries as contributing a little bit to the shortages. I happen to agree. This doesn't mean tariffs are bad, but lumber basically represents a natural resource and the US has limited timber producing area relative to its large population. So I do not see this as being like the tariffs on many other things. If the US tried to produce all the timber it used, that would put a big strain on the country's forest resources. It makes total economic sense for the US to be importing timber from Canada, or Russia. However, it's also true that timber product exports from the US to other countries are dramatically down, so I would think that would mostly compensate for the effects of tariffs on imports. I think the media is being a little bit dishonest by blaming these problems on the trade wars. Here's another article from 6 months ago where they are trying to blame the US timber industry being hurt by the trade war. US timber industry has been crippled by trade war and Covid-19 - Quartz (qz.com) It obviously doesn't make consistent logical sense to be blaming the trade war for reducing exports of timber, hurting American timber jobs, while simultaneously blaming the trade war for reducing imports of timber, creating shortages of timber. If the trade war is both reducing exports and reducing imports, then obviously those two "problems" should cancel each other out, and solve the problem by themselves. But it seems there are many people looking for any excuse to blame tariffs that get in the way of free world trade.
. A couple of weeks ago a woman called into the Dave Ramsey show and said what that article is saying. She said they were in the process of building a new house when they were informed the cost would rise another $30.000+ because of the current increase in the cost of lumber, etc. .
Well, it makes sense. When there are instabilities in demand, that makes it more difficult and industry has has to bear those costs. It is far more economically efficient when demand is constant and steady. Consumers stopped buying houses for two years and now they are trying to buy them again like normal; they are going to have to pay for that. There is a lag time between demand and industry meeting that demand. As this story shows, it's not only construction but the materials that go into that construction, as well as preparation of the building sites. What's happening now is perfectly normal and "healthy", from one perspective. Rising prices incentivize industry to more rapidly increase supply, provide a rationing mechanism when there is a limited supply of something, and in this case will also help to compensate the industry for the two-year lull in demand they had to suffer. Of course, these increased home prices are probably going to transfer to American households being more financially strained and increase the homelessness rate (in some small but significant way).
