North American lumber prices are soaring, sending homebuilding costs higher with it. The good news is, relief may be just around the corner. BMO Capital Markets updated its Benchmark Western Spruce-Pine-Fir (SPF) lumber forecast for April. The bank sees lumber prices dropping in the second half of the year. By 2022, they expect lumber prices to be at more typical levels. This should help alleviate some of the rising input costs driving new home prices higher.
Lumber Prices Rise Over 240%
Lumber prices are rising at an incredibly fast rate, hitting new records. The price of SPF lumber reached US$1,083/mbf this week, up 241.6% from a year ago. This is around twice the average price in 2020, which was the previous lumber price record. And you thought homes were a good investment? You would have made way more just hoarding wood.
The rise is partially due to strong new home demand, and the pandemic’s slowdown of industry. BMO sees these trends exacerbated by dealers not wanting to stock up at elevated prices. This would contribute to pushing home prices higher, as dealers avoid becoming bag-holders.
Home Builders Estimate This Can Add US$24,300 In Costs
The great lumber squeeze has added thousands to new home prices. The National Association of Homebuilders (NAHB) provided some numbers when lumber hit US$975/mbf. The organization estimates the price rise adds US$24,386 to the cost of a single-family home. Multi-family units are a little better at US$8,998/mbf, but still very high. It’s a big bump for home building costs, but the good news is BMO sees these prices falling soon.
Benchmark Western Spruce-Pine-Fir (SPF) Prices
Source: BMO; Haver Analytics; Better Dwelling.
Lumber Prices May Crash Soon
BMO is forecasting SPF lumber prices are going to fall over the next year, due in part to affordability. The bank warns, “affordability concerns could intensify should mortgage rates march higher.” Adding, “household wallets are not unlimited and at some point, demand could shrink amid a reluctance to shell out extra dough for the same studs and sheathing.”
The bank sees a sharp correction in prices as a result of production slowing, and rates tightening. SPF is forecast to fall to an average of US$415/mbf in 2022, down over 61.8% from this week. The bank expects prices to start falling in the second half of the year, straight through to 2022. “When the lumber market corrects it can do so in a hurry.”
If the BMO forecast proves true, home builders may experience a little relief from high input costs. This will either make home prices more affordable or building homes more profitable. It’s up to consumer demand and competition to see whether prices need to adjust to expectations.
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