In our youth, my wife and I were involved in residential construction with family, which enabled us to do a good portion of the remodeling of my parent’s house for our daughter. In August 2020, as we were winding down the remodel, we began building her a deck.
Unfortunately, not being a professional estimator led me to calculate somehow only one-half of the 5/4 deck boards needed. As we were only working some weeknights and Saturdays, it was mid-September before I realized my mistake. So, I sheepishly contacted our good friend who had supplied the lumber and let him know we needed another order of boards. The first order was expensive as it was, and when he let us know that the additional boards were ready, the price had increased by about $10.00 per board! I was stunned! How could this happen?
You guessed it—just like practically every other aspect of our daily lives, Covid-19 had struck.
The Impact of Supply and Demand
Upon placing our initial order, our friend could not give us a delivery date or guarantee our entire order would ship together due to the lumber shortage. But we got it pretty quickly, and I wrongly concluded that there must not have been much of a shortage after all. My eyes opened wide on the second order!
So, what led to the shortage? Fewer trees? No. Covid-19. Like many industries, the lumber industry felt the impact in all phases, from cutting trees to delivering the end product to retailers and wholesalers. Operations had to be adjusted, which slowed production and led to less supply. That, coupled with transportation issues brought on by illnesses and quarantines, led to less lumber being available for milling and selling.
At about that same time, mortgage rates started dropping, increasing the demand for housing. Then, as new construction and remodeling peaked, the lumber supply wasn’t there, and Economics 101 kicked in—more demand + less supply = higher prices.
Managing Higher Costs and Lower Mortgage Rates
In May 2021, the average cost of a new home increased by nearly $36,000 just due to lumber. And, virus-related labor shortages are still adding to the cost of building, impacting prices so that the demand for new housing may become stagnant. Lumber prices are now dropping, as evidenced by the 41% decrease in lumber futures for July compared to early May. This could result in more new homeowners being upside-down in their mortgages. When this happens, it is challenging, if not impossible, to refinance as the home’s value is potentially thousands less than the amount owed. Freddie Mac’s Enhanced Relief Refinance (FMERR) and Fannie Mae’s High LTV Refinance Option (HIRO) are some available options that could provide a solution for these homeowners.
For other homeowners who are experiencing financial difficulties, a short-term solution may be forbearance where the lender allows payments to be briefly suspended or reduced with no added interest, fees or penalties in most cases.
Hopefully, we’ll continue to see a reduction in prices for both lumber and houses. This way, most new homeowners can build positive equity and not owe more than the house is worth, or worse, face the possibility of losing their home.
On a final note, if you decide to take on a small construction project like building a deck, my advice would be to give some serious thought to having a second set of eyes look at the estimate before you order!