NAC Blog: Lumber shortages fuel the housing inventory crisis

Great Recession: Housing crisis hits the construction industry hard.

2008-2019: The lumber industry struggles to recover from the recession. In the U.S. and Canada, sawmills (where they convert the cut trees into the panels of wood we use for building homes), either closed or cut down on their operations.

2019: This was a pretty bad year for the lumber industry. Tariffs were placed on imports from Canada (where a lot of our lumber comes from), wildfires and beetle infestations in British Columbia Canada further reduced supply, and issues with the rails that are used to transport lumber to the U.S. caused a bunch of delays.

March of 2020: Everyone was waiting for a recession, everyone predicted an economic “correction.” Admit it, you did too. So, when the pandemic hit and the stock market went crashing down, the lumber industry said, “this is it.” Therefore, they cut back on their operations and the lumber industry prepared for a bad year.

Dr. Dietz: As of the end of May, the price of lumber stood near an all-time high of approximately $1,500 per thousand board feet. Since mid-April 2020, softwood lumber prices have increased more than 320%, from a starting and more normalized price of $350 per thousand board feet. The reason for this historic acceleration of lumber prices is basic economics: strong demand from builders and remodelers and insufficient supply. In particular, while single-family construction increased 12% last year, and the remodeling market was up 7%, domestic sawmill output only increased a little more than 3%. In addition, imports of Canadian softwood lumber (30% of our national supply) were lower by more than 10% when comparing 2016 trade levels and 2020 totals. This is a period when tariffs were placed on such imports.

Moreover, as with the broader economy, it’s not just lumber that’s limiting additional inventory. A broad set of building materials and goods are in short supply, whether it be appliances, trusses, steel fasteners, windows/doors, cooper, and more. In fact, on an aggregate basis, a NAHB survey found that for a typical new home, material pricing on a per home basis had increased 26% over the last year. In addition, construction times are being extended due to delivery delays.

Consequently, it costs more and is taking longer to build homes, apartments and complete remodeling projects.

Dr. Dietz: Everyone in housing knows we have a deficit of housing inventory in the U.S. For example, a Freddie Mac analysis found that the country is short more than 3 million homes relative to demographic need. Higher material costs, including lumber, are making it that much harder to close this deficit, particularly during this time of near historically low-interest rates. NAHB analysis has estimated that these higher lumber costs alone are increasing the cost of building a single-family home by $36,000 and raising the cost of a typical apartment by about $13,000 ($120 a month in rent). And of course, higher costs tend to price out first-time and first-generation buyers from the market first and increase already harmful rent burdens.

Dr. Dietz: All housing stakeholders have an interest in encouraging policymakers to take actions that will lead to additional housing supply. So in addition to policies that would increase the construction labor force and enacting zoning reform rules that would allow for additional land development, NAHREP members can also be engaged with their representatives to find ways to increase domestic production of building materials, including softwood lumber, as well as encouraging the Biden Administration to reduce tariffs on imported Canadian softwood lumber and achieve a new softwood lumber agreement.

Unfortunately, our forecast now sees these supply-side material challenges persisting into 2022, which will result in higher housing costs nationwide. Fortunately, the demographics for housing demand are and will remain quite strong given the years of underbuilding over the last decade.