Why Were Lumber Prices Skyrocketing (And When Can We Expect Them To Return To Normal?)

Written by Barry Prim on July 12, 2021

Warren Averett Asset Management lumber prices image

We’ve all seen it and been amazed. Lumber prices reached almost two to three times what they were just a few years ago.

There has been a perfect storm of economic changes brewing over the past few years that led to lumber prices going up. So, now we find ourselves asking: How? And why? Was someone price gouging us? And—most importantly—when will it end?

Why Did Lumber Prices Go Up?

It’s helpful to understand why lumber prices are up in the first place. There are three primary reasons why lumber prices were much higher than normal.

Warren Averett Asset Management When Will Lumber Prices Go Back Down Image

1. There are fewer lumber mills.

The first reason has developed over many years: a consolidation in the number of sawmills to refine the raw product. In fact, employment at sawmills is down 30% from 20 years ago. Sawmills are capital intensive endeavors. By nature, they’re very expensive to build, maintain and staff.

For a while now, lumber prices have been average to below average, and that made it quite difficult for lumber mills to operate profitably. Many of the smaller lumber mills closed, and while the ones remaining could comfortably handle the demand, they had less overall capacity than before to handle any demand shocks.

2. Lumber supply was lower.

The second reason has a little to do with the first. For years, the U.S. has imported a good amount of lumber from Canada, but not everyone was happy about it.

The U.S. lumber industry complained that this “dumping” of lower cost lumber was artificially lowering prices for domestic lumber producers. Well, in 2017 the government decided to do something about it and raised the lumber tariff to around 20%.

With the increased tariff, less lumber was imported from Canada, which meant that the overall U.S. lumber supply was lower than it had been in years past.

3. Lumber demand is higher.

While all of this sounds very patriotic, it’s the combination of the first two reasons with the third reason that really set the upward swing in motion—and that’s a worldwide pandemic and forced government shutdown (including the mills we need to turn the timber into lumber).

One of the strange, unexpected trends from the forced shutdown of businesses was what people did with their time at home. As it turns out, a lot of them—and I mean a lot—decided to either fix up their houses or look for a new one. Of course, that requires lumber—and a lot of it.

With mills running at zero capacity and a reduction in supply and demand unexpectedly running through the roof, the existing supply of lumber was gobbled up quickly, and the mills couldn’t make enough to re-stock.

Add all these things together, and you get really pricey lumber.

When Will Lumber Prices Return to Normal?

The question of when lumber prices will return to normal is not an easy one to answer.

The bottom line—and the ultimate answer to the question—is that it will take addressing the three root causes listed above before it can get better. But the good news is that the process for lumber prices going back down has already started!

The U.S. government has eased up on the tariffs (for now anyway). Mills are back open at full capacity, and more are under construction. But the demand for lumber is still above average, and that demand may stick around for a bit.

So yes, lumber prices will go down, but it might be a while before they return to normal. Until then, maybe we should all agree to re-do our yards instead of building that deck!

 

 

This article reflects information available at the time it was written and should be used as a reference only. Talk to your Warren Averett advisor, or a professional advisor of your choosing, for the most current information or for guidance specific to your situation.

 

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