Will Soaring Wood Prices Weaken The Housing Upturn?

Inflation seems to be relatively quiescent, but there is one industrial sector in which it has appeared with a vengeance. Lumber prices have soared an astounding 90% since early October, provoking an angry reaction from homebuilders and other consumers.

At first glance, there seems little reason for such an outsize jump. On the demand side, neither housing starts nor existing home sales (which spark purchases of lumber for remodeling) exploded at the end of the year, though they did strengthen perceptibly. On the supply side, the market had long been aware of the restrictive impact of reduced federal timber sales on long-term supply. But demand is affected by perceptions as well as by actual activity, and buyers' perceptions changed dramatically in the final months of the year.

What happened, say industry experts, is that market participants--from mills to homebuilders and remodelers--realized that the housing recovery was finally on a strong, sustainable path. As the pickup in economic activity and the downward trajectory of mortgage rates resulted in strong interest from home buyers, lumber users boosted orders.

At the same time, however, lumber supplies were being constrained by government policy. Since 1990, when concerns about the survival of the northern spotted owl emerged in the Pacific Northwest, the sale of timber on federal land, which accounts for nearly half of all softwood timber stock, has declined by over 50%. As a result, more than 100 lumber mills have closed. Meanwhile, timber harvesting in Canada, the major source of imported lumber, is also being cut back for environmental reasons.

The upshot is that a surge in demand from builders late last year hit a market with reduced capacity to respond--a situation aggravated by unusually low stocks in the hands of lumber wholesalers and dealers. And as demand surged through the pipelines and prices took off, some buyers boosted their orders to beat future hikes, while some sellers slowed sales to profit from the runup.

To the extent that all this represents a speculative bubble, the predictable outcome is a near-term correction. But homebuilders fear that the correction will be small and short-lived. They calculate that price increases since early October add some $4,600 to an average single-family home costing about $120,000. "The high cost of lumber threatens to weaken both the housing upturn and the economic recovery," warns economist Michael Carliner of the National Association of Home Builders.

Meanwhile, though companies that grow their own trees are currently coining money from their wood operations, those mills that buy from government lands are being squeezed. So forest-product companies are pressing the White House to convene its promised "timber summit" within the next few months to resolve the environmental debate over timber policy and ensure a dependable long-term solution to the supply problem. And carpenters, lumber dealers, and homebuilders are lobbying, as well.

The irony for the latter groups, however, is that any steps approved at the summit are unlikely to affect lumber prices for many months. As the spring and summer building seasons approach, lumber prices are in the grip of the market. And this year, the market is a tiger.

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