As if construction projects haven't been plagued with enough problems this year, it seems that lumber prices are headed skyward yet again. According to the Bureau of Labor Statistics Producer Price Index (PPI) report, softwood lumber prices have increased 9.1% in October alone, representing the first monthly increase since May.

According to the National Association of Home Builders (NAHB), climbing lumber prices are responsible for an approximately $30,000 gain in the average price of a new home, further compounding the dramatic increase in home prices this year.

Something has to give -- the market is showing signs of being unwilling or unable to bear much more in the form of construction slow-downs and 152,000 single-family homes that have been permitted but not started (a 43.4% increase year over year).

"The rising count of homes permitted but that have not yet started construction is a stark reminder to policymakers to fix the supply chain so that builders can access a steady source of lumber and other building materials to keep projects moving forward," explained Chuck Fowke, NAHB Chairman.

Two people work on a construction site, framing a house.

Image Source: Getty Images

The influence of Canadian lumber on pricing

Although many of the problems with lumber pricing come from huge demand and inconsistent supply due to the supply chain's ongoing shenanigans, another large part of the lumber-pricing puzzle is Canadian softwood lumber. Because American builders get a significant portion of their lumber (more than a quarter) from Canadian sources, anything that increases the price of Canadian lumber increases the price of lumber to construction sites.

In 2017, the Trump administration added a significant tariff to Canadian softwood lumber of 20% across the board and up to 24% to specific lumber companies. Although other factors were certainly at play, lumber prices climbed from about $400 per thousand board feet in early 2017 to $600 per thousand board feet by the summer of 2018.

Even when tariffs were reduced to 9% in December 2020, Canadian lumber prices remained high. It didn't help anything that several sawmills either shut down entirely or cut production shortly thereafter, anticipating a decrease in demand during the pandemic. So, between the already high Canadian tariffs and a supply crunch, lumber prices were practically destined to be pushed upward.

Potential downward pricing pressures on lumber

Although it all sounds pretty doomy and gloomy, there is hope for a little relief on the lumber front in the near future. The NAHB is pressuring the Biden administration to lift lumber tariffs from both Canadian and Chinese lumber sources to help lower prices by increasing supply.

"On the trade front, until a long-term solution can be reached, Congress and the administration should temporarily suspend duties on a wide array of imported building materials and goods, from Canadian softwood lumber to Chinese steel and aluminum," Fowke said in testimony to the House Small Business Subcommittee on Oversight, Investigations, and Regulations on Oct. 20. "In addition, policymakers must continue to aggressively explore solutions to ease building material supply chain disruptions that are causing project delays and putting upward pressure on home prices."

Along with reducing the raw cost of materials, the demand for said materials may soon ease, as the Federal Reserve announced it would be winding down a bond-buying program meant to provide pandemic relief to the wider economy. When the Feds buy fewer bonds, longer-term interest rates naturally rise, which should, in a normal housing market, cause a reduction in demand for housing due to rising costs to buyers.

Less demand for housing, including new housing, should help reduce supply chain bottlenecks, allowing lumber to flow more freely to the projects that remain. Less demand for lumber should mean that prices will drop, but there are a lot of assumptions in this paragraph. For example, we're assuming that, somehow, the shortage of housing units will spontaneously resolve. We have no way to know whether that will happen, especially given how hopelessly limited inventories have been for some time.

Other signs point to sustained high prices. For example, lumber futures are continuing to rise, leading some to believe that lumber prices will continue to increase through the first quarter of 2022. But if the pandemic and subsequent supply chain debacle have taught us nothing else, it's that there's absolutely no way to know what's coming next while the global economy is trying to right itself.