You might think that home prices are only impacted by high demand and low inventory, but that’s not entirely true. In fact, the price of building materials also plays a significant role. Specifically, lumber.

The price of lumber has always been up and down due to different economical factors. Just check out this chart on tradingeconomics.com. While slowly on the rise, there are large peaks and deep valleys indicating spikes and dips in price over the last few decades. In just 2020 alone, there has been a massive spike in the price of lumber.

In September of this year, the price (USD) per 1,000 board feet reached a new high at $984.50. At the same time last year, the price was $374 per 1,000 board feet. Interestingly though, there was an immediate drop and as of October 28, the price is $502.90 per 1,000 board feet. Since mid-April, the cost of lumber has increased over 170 percent, according to cnbc.com. That’s adding an additional $16,000 to the price of building a single-family home.

Why Did the Cost of Lumber Spike?

Well, demand of course. As demand in the housing market steadily grew since the start of the COVID-19 pandemic, so too has the price of lumber as more and more houses were being built to compensate for the lack of inventory on the market, and as families decided to move away from urban centers.

How Many New Homes Were Constructed in 2020?

The price of lumber has started to decline since September, but it’s important to take note of how many homes were built during this surge in lumber pricing. Census.gov released statistics covering exactly that. In the month of September alone, there were:

  • 1,553,000 building permits
  • 1,415,000 housing starts
  • 1,413,000 housing completions

That’s over 2.8 million new residential homes largely affected by the high cost of lumber, nationwide.

What Does This All Mean?

It is another reason why we’re seeing increased home prices. Even as inventory starts to come back to the market and extreme buyer demand levels out, prices will likely remain high for newly built homes due to the cost of building materials seen during the past six months.

The point? To understand that there is more going on in the real estate market that is affecting prices than simply low inventory and exceptionally high demand. This is not a surface-level issue that will be quickly corrected, there are deeper effects. While a market correction (rather than a crash) does seem to be the most likely result, this may not occur for some time because of the ripples caused by buyer demand and other pandemic related issues. It may be a fair assumption to say we should not expect to see prices truly decline for some time.

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Customers use The Warren Group to identify new business opportunities through access to comprehensive real estate and mortgage data, analytics, and industry news coverage. The Warren Group was established in 1872 and is now in its fourth generation of family ownership and management. It is the publisher of Banker & Tradesman, The Commercial Record, and The Registry Review. For more information visit www.thewarrengroup.com.