What is going on with lumber prices and what does it mean for the general economy? This is Dave Pelligrinelli, licensed building contractor, general contractor, and we’ve been monitoring the construction industry from an economic standpoint for several years now.
Overview of Lumber Prices
One of the things that’s a very clear indicator of what’s going to happen in the building industry, but also in the general economy, is what happens to lumber prices. And if you’ve been watching our channel for the last few years, you’ve seen us monitor the huge spike in lumber prices that happened a few years ago and what that meant, and all those predictions came true.
Current Lumber Prices Dynamics
So now there’s a different dynamic happening with lumber prices, and that is that they’re crashing. And it’s at a time when they’re not supposed to be crashing. Lumber prices this time of year are supposed to be solid because it’s the building season. People are supposed to be doing new construction, additions, remodels, and the fact that demand is not there and also the fact that lumber prices are crashing is kind of a canary in a coal mine for what might be happening in the future.
Supply and Demand Factors
The other invisible factor is over the last 18 to 24 months many sawmills and lumber producing equipment providers have shut down. And even though the capacity for producing lumber and building goods has been reduced, it’s still not enough to keep prices from falling even with lower production. And that’s because the demand is really, really low.
Implications of Low Demand
What does that tell you? Well, where does demand come from? Demand comes from people in the building industry, developers, speculators who are purchasing lumber to build new homes, to put additions on homes, to do speculative construction. These industries, these professionals are not putting that money out there. They’re not betting their money that there’s going to be a demand for homes in the future, the near future, you know, six to 18 months.
Economic Indicators
And they’re probably right because they know what the demand is. They’re talking to realtors. They’re seeing the economy. It has to do with interest rates. Even though they’ve leveled off a little bit, they’re still high, and most people realize this is where they’re going to be. It also has to do with the general economy where people are not as overemployed as they used to be.
Employment and Income
Employment level in terms of percentages is not really, really bad, but the income level for people compared to the economy, compared to inflation, is very, very low. Even if your income got bumped up 2 or 3% a year for the last, you know, few years, inflation has gone up 15 or 20%, sometimes 30% in the last same period of time. So people are feeling like they’re making less money.
Home Improvement and Construction
They’re not going to be out there looking to upgrade their home either to do an addition, to do a remodel, or to buy a new home because it’s going to be expensive. The builders know this. The people with money know this. So they’re not putting the money out there.
Future Economic Outlook
So what does that mean for the future? In the short run, it tells you that if you follow that trend and you can clone that logic, the economy is not going to be great in the next few years for large-scale purchases and for employment and for GDP.
Long-term Housing Market Impact
You may also find that five or six years down the road, 2028, 2029, you may find that there’s another housing shortage. Because if the builders are holding back on constructing new homes right now, there’s going to be an echo domino effect of that. That in a few years as the population still grows, there’s going to be a need for more homes.
Shift to Rentals
What’s happening is more and more people are turning to rentals as a way to have a roof over their head, whether it’s an apartment complex or single-family home rentals. These rentals are being provided by large-scale commercial real estate owners, their hedge funds, their investment funds that own these buildings.
Market Predictions
And the fact that that’s where the money is flowing to tells you something. The money is predicting that rental will be the wave of the future for home ownership. Another factor that is affecting this, and who knows if it’s cause or effect, is insurance.
Rising Insurance Costs
It used to be that in most parts of the country homeowners insurance, property, and casualty insurance was relatively reasonable. It wasn’t a huge part of your budget except for maybe in catastrophic areas like Florida with hurricanes, California with wildfires, maybe earthquake, some coastal areas with flood. But now you’re finding that insurance rates are getting into the catastrophic range for homeowners, property, and casualty in many parts of the country.
Geographic Impact on Insurance
Oklahoma, Iowa, Missouri, Texas are all seeing homeowners rates going up 20, 30% because of catastrophic risk from flooding, from tornadoes, from wildfires. And this is spreading around the country. This is putting a crimp on home ownership cost because the price of the home and the mortgage is only one part of your monthly payment.
Overall Cost Impact
Your insurance is part of that, your taxes are part of that, and as insurance goes up, it may cut back 20 or $30,000 off your buying power of buying a new home. And that’s going to affect people’s budget, and that could be, you know, 10, 20% of what somebody can spend for a house.
Conclusion and Call to Action
So I know you have opinions about this. Let us know in the comments what your experience is for your budget, your home ownership budget, and what you expect to be doing in the future and what you expect to be happening for home ownership rates in the United States.
