June 21st, 2021 4:36 PM by Devin Murray
So I was getting a haircut at noon the other day and my stylist brought-up the cost of lumber in conversation. She is extremely sharp, but it took me back because I know she is not buying, selling, or building and this was the second time in about 4 weeks she mentioned this. A few weeks earlier I was at a family gathering where this came-up. I overheard a couple discussing it while I was eating lunch in a downtown café a few weeks back. It would seem that lumber prices (and maybe a shortage of chips for auto manufacturers) is the talk of the town everywhere I go. Since I finance residential properties and pay attention to economic data, I felt compelled to contribute some factual and maybe useful information to the ongoing discussion.
After reading-up it appears the shutdowns in 2020 impacted the processing of lumber in the US at the mill level which eventually decreased supply while demand seemed relatively steady. To heavily oversimplify the discussion anyone can track the price of lumber because it is a commodity and lumber futures (aka futures contracts) are traded on the NASDAQ exchange using symbol LBS. In the real-world cash lumber prices we experience at the local store versus lumber futures are not exactly the same but let’s assume they are and skip the explanation of how and why they are different for now.
At quick glance at LBS you can see it did began a meteoric rise in early March 2021, reached a peak price of around $1,700 in early May but as of the third week of June prices have already corrected back to $900 early March levels. For all of 2020 we saw an average in the $400-500 range (excluding when COVID immediately hit) and in the last five years the mean was somewhere around $350-400. So is the cost of wood going to remain in the current territory of basically double and triple what we have seen in the last five years? Economics say prices we have seen in the last 90 days aren’t sustainable and we have watched the sharp decline they predicted will continue. But what does this actually mean for the hair stylist, my family members and the few dozen others who have mentioned it?
I never mentioned this to anyone but when prices were in the $1,600 range I ran into my contractor on the baseball field and yet again he brought it up. When I asked this same question he smiled at me and said, “Let me put it to you this way, a lumber package for an average 2000 square foot house is about $25,000 higher than this exact time last year”. Really I thought? “Seriously, that’s it?” I said aloud.
Given the price of lumber futures being down 40%+ since I had this conversation that would mean the cost difference for that same 2000 square foot home is now on $15,000. To put that in to perspective that is about the cost of 75 additional square feet or a forced downgrade of flooring or cabinetry in most homes. Coupled with the cost of what the full $25,000 was before March 2020, most people would never feel a significant impact of this at all.
In essence the cost of money plummeting in the last 15 months NOT lumber cost should still overshadow the hottest topic around town. Fact is if you are buying, selling, building or remodeling this is a fair warning to get moving as quickly as possible as 30 year rates seem to be rising above the 3% mark yes even in a seller's market. For anyone else not in this category, I would also encourage you to learn about why the cost of money is so different in 2021 especially those who are mortgage free.
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