The demand for new homes remained strong in 2020 but the number of homes built has significantly slowed down due to a lack of material, causing a growing gap between supply and demand. The average price of lumber has surged more than 170% since April, reaching a record high of over $800 per thousand board feet and boosting prices of new single-family homes by $16,000.
This isn’t the first time the nation has faced a lumber shortage. But the pandemic has been keeping everyone at home and buyer interest has been increasing in the suburbs, exurbs and small towns. Because of the spike in demand paired with the recent decline in available domestic lumber, there has actually been a delay in finishing homebuilding projects, with November seeing a decline in new home sales by 11%.
As new home projects take longer to complete and are harder to sell, builders are starting to consider other materials such as recycled material and prefabricated mass timber, providing builders a greener, more durable and cost-effective alternative to concrete and steel. Builders have also started to renegotiate contracts to include escalation clauses so customers are responsible for any additional or fluctuating costs. 81% of builders have also started raising their base price in mid-December compared to the month before.
Buyers are also trying to alleviate the affordability gap by looking to build in high-risk counties. Of the 13% of counties most-at-risk, six are among the top 10% fastest-growing counties in the country.
For homeowners, this increased price in lumber could also contribute to an increase in home insurance premiums in two ways: renovations and replacement. Due to stay-at-home orders, 62% of homeowners were planning a home renovation or maintenance project in 2020 with residential construction spending reaching 16.1% higher than a year ago. They were also spending $250 more on lumber-related DIY home projects just from going to the hardware store.
While more renovations opens up the conversation for builders' risk insurance and updating home insurance policies to include any significant upgrades, a lumber shortage could also directly impact replacement costs when analyzing home insurance premiums. It’s also important to reconsider homeowners’ current coverage and determine if plans have room to absorb a spike in home repair costs or if it means the actual replacement material could change, especially when it comes to older homes.
On a national level, The U.S. Commerce Department is considering decreasing the Canadian soft lumber wood tariffs from 20% to 9% with the aim of increasing availability and provide builders with material en masse. NAHB also has submitted letters to the Commerce secretary, U.S. Trade Representative and the executive director of the U.S. Lumber Coalition to talk strategies on easing the market further. States like Oregon and Washington have also heavily pushed the popularization of mass timber, stating that it could relieve some of the pressure on the lumber market and quicken the pace of building new homes due to its engineered and lego-like nature.