Record-High Lumber Prices Threaten Housing's Momentum

Lumber prices reached a new high last week as housing demand remains solid amid low mortgage rates, favorable demographics and a geographic shift in housing demand to lower-density, lower-cost markets. However, recent readings of the NAHB/Wells Fargo Housing Market Index (HMI) indicate the strong momentum for housing demand is slowing. Although February’s HMI ticked up from the previous month to a level of 84, this gain followed two months of declines after the index showed builder optimism at an all-time high in November.
Given the recent strength for home construction, supply-chain limitations are a critical element of the 2021 outlook. Lumber prices are up more than 70% since mid-November, and 96% of builders are reporting shortages and delays for lumber and other building materials at the start of 2021. While there is some room for new home price growth, particularly relative to the strong gains for existing homes over the last year, prices cannot outpace household incomes indefinitely. This is particularly true as interest rates increase. For example, the 10-year Treasury rate is now above 1.2% as markets expect a faster pace of reopening due to declining virus case counts and increasing vaccination rates. Overall, housing affordability conditions at the end of 2020 were flat, per the NAHB Housing Opportunity Index. However, the long-run trend has been declining affordability, putting additional households at risk of becoming priced out of the market.
Because of these cost and supply-side challenges, and a historically low inventory of existing homes for sale, prospective home buyers have growing reasons to be frustrated with their home searches. Indeed, the NAHB Housing Trends Report at the end of 2020 found that the share of prospective home buyers who lost a bidding war during the previous three months had more than doubled from a year prior.
Unfortunately, these supply-chain issues are not likely to be resolved soon. Global supply chains remain interrupted and increasing demand for materials as the economy reopens is likely to place additional pressure on the building materials market. Policymakers must act to improve domestic building material supply so that the residential construction industry can continue to create jobs and add much-needed inventory to the market.
–NAHB Chief Economist Robert Dietz