Burning wood prices may chill the housing boom

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Burning wood prices may chill the housing boom


Soaring lumber prices are slowing the US housing market.

The number of building permits issued in March increased 2.7% month over month to a seasonally adjusted annualized rate of 1.766 million. The rise is just a failure on the radar compared to the 19.4% increase in housing starts, which rose at their fastest pace in almost 16 years. Typically, construction begins within two months of issuance, according to the National Association of Home Builders.

Some developers have “held on to their plans on the assumption that prices would drop soon,” wrote Matthew Pointon, senior real estate economist at research firm Capital Economics.

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XLB MATERIALS SELECT SECTOR SPDR FINB 82,64 +0,97 + 1,19%

HOUSING SHORTAGE INCREASES AS MILLENNIUMS BEGIN TO BUY HOUSES

Pre-month lumber futures traded at CME Group have climbed 47% this year to $ 1,286 per thousand board feet. Prices are up 395% from their April 2020 pandemic low of below $ 260.

Source: FactSet, Dow Jones Market Data

The sharp rise in prices comes as wood supplies have been depleted this year as Americans embarked on home improvement projects while locked in their homes during the COVID-19 pandemic.

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Restaurants added to the tightening of supply by increasing the ability to sit outside to serve customers who were not allowed to dine inside.

All of this was compounded by a sharp drop in production, as factories were closed during the early days of the pandemic and took a long time to ramp up production.

Soaring prices have made it “virtually impossible to negotiate a deal with a potential buyer that won’t be changed even before construction begins,” Jerry Howard, CEO of the National Home Builders Association, told FOX Business last month.

He said the price increase had pushed up the price of a new home by tens of thousands of dollars and builders needed to add escalation clauses to contracts. A recent report from CoreLogic found that house prices rose 10.4% year-over-year in February, posting their biggest increase since 2006 – just before the housing bubble burst.

The current rise in lumber prices has “manic features,” wrote David Rosenberg, chief economist and strategist at Rosenberg Research in Toronto.

He warned that prices might not come down anytime soon as they may “stay overbought for long periods of time before they finally relax.”

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Regardless of the direction of prices from here, home builders may not be able to wait much longer to start building.

“A large backlog of homes that have been licensed but not started will support single-family home construction this year,” Pointon wrote.

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