Here's How Developers are Adjusting to Rising Lumber Prices

Following a few months of moderating prices last spring and summer, lumber prices are soaring once again.

Over the past four months, lumber prices have nearly tripled, causing the price of an average new single-family home to increase by more than $18,600, according to the National Association of Home Builders’ standard estimates of lumber used to build the average home. 

This lumber price hike has also added nearly $7,300 to the market value of the average new multifamily property, which translates into households paying $67 a month more to rent a new apartment.

According to Random Lengths, as of Dec. 29, the price of framing lumber topped $1,000 per thousand board feet—a 167% increase since late August.

Developers said that this pricing environment is leading them to include escalation clauses in their contracts and more often spec building to preserve margins.

Why Lumber Prices Have Surged

The unprecedented price volatility in the lumber market dates to April 2020 when the COVID-19 pandemic took hold and sawmills curtailed production in anticipation of reduced demand. When it became clear in the ensuing months that housing weathered the storm much better than predicted and demand remained strong, lumber mills did not ramp up production, accordingly.

The slow reaction by sawmills, combined with massive uptick in demand from do-it-yourselfers and big box retailers during the pandemic resulted in lumber prices peaking at a record-shattering $1,500 per thousand board feet in May 2021, before beginning a gradual decline through late August.

This most recent lumber price upsurge is due to a number of factors, according to NAHB, including ongoing supply chain disruptions; a doubling of tariffs on Canadian lumber imports into the US market that increased price volatility; and an unusually strong summer wildfire season in the western United States and British Columbia.

Spec Building Mitigates Risk of Price Spikes

Housing analysts at Zelman & Associates, a Walker & Dunlop company, tell GlobeSt.com that when soaring lumber costs first became an issue last year, builders began including escalation clauses in their contracts.

“We’re starting to see more builders return to spec building,” a spokesperson from the firm said. “They weren’t able to do this earlier in the pandemic because they couldn’t keep up with all the orders they were getting when demand surged, but after benefiting from that for a while, we started to see them intentionally hold back sales. 

“They did this for a few different reasons but one was to pivot to more spec building. Spec building mitigates the risk of rising input costs eating away at your margin. Instead of committing to a purchase price before the home is under construction, you build the home first and then set the price further into the process when material costs are already known. 

“While this is helpful in managing the risk of increasing costs, there is also a risk that the builder could get caught with excess inventory if demand changes.”

Pre-Ordering Lumber an Option

Crystal Sunbury, real estate senior analyst with RSM US LLP, tells GlobeSt.com that pre-ordering lumber helps builders to secure prices and availability. According to a recent NAHB survey, 29% of builders reported placing pre-orders. “This can be effective as builders look to secure materials for the spring building season; however, builders must also factor in the cost of storage fees and insurance,” she said.

Builders have also been successful obtaining price guarantees from suppliers to avoid the rising costs, with 22% of builders reporting obtaining such guarantees, according to the NAHB survey, Sunbury said. “Although these are generally only guaranteed for short periods of time, with most builders obtaining guarantees for less than 30 days.”

The longer term picture, though, is worrisome. “Without a solution, developers must adapt to new forms of construction, including manufactured housing, non-lumber-based materials, and higher density of smaller units to attempt to keep the cost to each consumer within an affordable range,” Chris Loeffler, CEO and co-founder of Caliber Cos., tells GlobeSt.com.  

Renters and homeowners can hardly afford the increases either, especially when coupled with other rising development costs, David M. Curry, Attorney, Farrell Fritz, P.C., New York, tells GlobeSt.com. These include uncertain real estate taxes and COVID-related market conditions such as limits on the number of workers allowed on a job site and they have forced multifamily developers to increase rents that renters can ill-afford.