A handful of products define the collective memory of the first days of the pandemic. There were weeks of toilet paper flying off the shelves, to the point where you had to barter for more than a roll or two. For a while, everyone was buying yeast because it seemed critical that we all bake sourdough. And then there was the lumber craze, when lumber prices soared to record highs.
After we all piled into our homes, many people looked around, realized they hated where they lived, and decided it was time to make a (sometimes drastic) change. That meant a lot of moving, even more renovation projects, and a lot of lumber. Unfortunately for motivated remodelers, the supply side of the equation was caught flat-footed: sawmill operators had scaled back operations under the assumption that the pandemic would mean less activity, no more. The price of Western SPF two-by-four lumber — an industry benchmark — rose from under $400 per thousand board feet in January 2020 to over $1,600 in May 2021.
But what comes up often comes down, and lumber prices fell sharply as demand slowed and supply increased at a rate that is no longer needed.
“It’s low and slow, and it’s been that way for a while,” said Stinson Dean, CEO of Deacon Lumber, a lumber trading company.
A large part of the industry is losing money at these prices right now.
After peaking in the spring of 2021, lumber prices fell briefly before rising to $1,400 in early 2022. Later that year, prices dipped to the $300 to $400 range and they are stuck there. While those prices are similar to pre-2020 levels, Dustin Jalbert, senior wood products economist at RISI Fastmarkets, told me that changes in the industry and the higher cost of production meant lumber suppliers were being squeezed.
“A large part of the industry is losing money at these prices right now,” Jalbert said. He jokingly said that Lenda was having another “moment” in the media, “but for opposite reasons”.
Supply and demand were the culprits when prices rose, and they have also helped to bring them down. Let’s start with the demand side: The Federal Reserve has raised its key interest rate over the past few years, bringing mortgage rates along. The average 30-year mortgage rate was under 3% just a few years ago, but now sits at around 7%.
High interest rates mean fewer homes are being built and sales of existing homes are down to levels not seen since the Great Recession. If you own a home and are looking to move, the idea of doubling your loan rate is a tough pill to swallow, keeping people on their toes.
Remodeling and repairs have also slowed. Many activities were pushed forward during the pandemic – those who wanted to build a new deck or an addition already did so in 2020 and 2021. Even if people I DO have projects they would like to undertake in their homes, they are not really disappointed about using their home equity to do so, given the interest rates. Homeowners also tend to do the most work on their homes within a few years of buying them, so if they’re not moving, they’re not renovating either.
Paul Jannke, a director at Forest Economic Advisors, said this poor housing market is a big problem for the lumber industry. He said residential construction – including new builds, renovations and repairs – accounts for 70% to 75% of current timber consumption. Housing starts are down 18% from where they were in the first quarter of 2022 to the first quarter of 2024, and spending on home improvements is down 21%, adjusted for inflation, he said. Given the weakness there, you get the question of demand.
At the supply end, the long and short of it is that the manufacturers got a little out of their (wooden) skis. The amount of timber produced may have been good in 2021, but not so much now.
These pandemic-era high prices caused many people to invest in sawmills (like where a tree goes to be made into a stick of wood), especially in the southern US. Some have shut down, but on the net, U.S. sawmills are producing about 4 billion board feet more than they were in 2022, Jannke said. It’s not just an American problem: Suppliers in British Columbia have historically exported a lot of lumber to China, but the Chinese property market has collapsed, so lumber isn’t being shipped overseas and is instead being diverted to the already stifled U.S. market . Tariffs on lumber coming from Canada to the US are expected to rise this summer, so Canadian mills are continuing to hold production ahead of that.
“There’s a lot of wood,” Jannke said.
Part of this is a classic bullwhip effect, a phenomenon where changes in consumer demand cause large fluctuations in the supply chain. It’s also classic greed – people saw the amazing lumber prices in 2021 and 2022 and decided it was time to get into the production game or build out existing operations.
“A lot of people became optimistic,” Jalbert said. “The thing to think about is the time it takes to start a sawmill. It takes two to three years to grow that supply — let’s call it 18 to 24 months from the start of the project to the time it’s fully ramped up.” capacity.”
All that new production capacity became operational just as things started to change.
“There was a lot of investment in new supply that was planned before COVID, and then ramped up during COVID,” Dean said. Some of those projects were paid for with cash, but others were financed with debt, and sawmills are still pumping out supply to pay off those debts. Instead of scaling back and waiting for prices to recover, they’re stuck producing lumber for a market that doesn’t need it.
It’s the prisoners’ dilemma, but for wood.
“They’ve got cash flow stress, they’ve got debt to service, and they’ve just got this brand new structure, so they can’t really afford not to have any kind of cash flow,” Dean said. “They’d rather lose money and run their own new facility.”
The path to higher prices likely goes through sawmill shutdowns, but many in the industry aren’t ready to pack it in. Some mill operators feel they’ve done their fair share to slow down operations, and now it’s someone else’s turn. It’s the prisoners’ dilemma, but for wood. Many lumber producers, like many people, came into the year expecting the Fed to cut interest rates more quickly, sparking a new wave of demand. This has not happened. Mill operators also recall the experience of not having enough supply to meet an increase in demand, and they know that ramping up takes time, so they may be reluctant to taper off.
Longer term, there is room for optimism. The US needs to build more housing, so long-term fundamentals look good and interest rates are likely to eventually come down.
“Low interest rates fix this in a hurry, because demand can come back very quickly,” Dean said. He told me he’s taking it easy for now, “posting a lot of fishing photos and waiting for the market to figure it out,” and preparing to work a lot harder once things pick up again.
While those in the lumber industry may not be having a great time, if you’re in the market for lumber, it’s a good time to buy. Dean said that if the lower prices haven’t filtered into stores yet, he expects they will soon.
“If you’ve been putting off a remodel for three years, a deck, a fence, now — and you have to look at the prices — this summer will be the best time to get materials for that in more than four years.” said the Dean.
If you really want to get into the weeds about it—and I suppose if you’re thinking about a big project you do—there’s some wonder. While timber framing prices have fallen, the costs of many other building materials have not. If you’re building a deck, for example, the deck boards won’t be free, although the framing will be. Building a home is still much more expensive than it was in 2020. Robert Dietz, a senior vice president and chief economist at the National Association of Home Builders, said the costs of residential building materials rose by more than 46% since May of that year. They have been roughly flat over the past two years, in part due to declining timber.
“Other prices remain elevated for material costs, which means home prices will remain high,” Dietz said. The silver lining here is that building a new home is not HOW as expensive as it might have been if the lumber hadn’t gone down – the decline in lumber has helped keep prices relatively stable over the past couple of years.
Jannke said that while lower lumber prices had not resulted in lower housing costs, “homebuilder margins are at or near record levels.” If you’re paying a contractor for your project, he may not be too keen to pass on the price savings to you. They are paying for other factors like labor, maybe wiring and sheets. They also run a business where they want to make as much money as possible.
“They’re not quoting the job lower because the price of dimensional lumber is lower,” Jalbert said. “They quote a job because they look at what people’s incomes are and they look at what house prices are and they say, no, that’s the price for that job, no matter what the inputs are.”
That doesn’t mean you have to accept the quote without question. You can try to negotiate – hey, maybe even show them this article and argue that things should be cheaper for them. Or, if you dare, you can always buy in bulk and try to make it yourself.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.