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The reason behind the historically high lumber stocks

Posted at 10:16 PM, Nov 04, 2020

Lumber stocks are at a historic high. We haven't seen these numbers since the 2008 housing boom and then crash. Experts say that's in part because of the housing market and record low mortgage rates.

2020, the unprecedented year where nothing goes as expected, has brought us what realtors call a "sellers' market".

"There’s plenty of buyers in the marketplace, but not enough supply so what we are seeing is multiple offers happening frequently on mid-price homes. So heavy competition in the marketplace.” Dr. Lawrence Yun, chief economist for the National Association of Realtors, said.

The country's largest trade organization has 1.4 million members who help people buy and sell homes. Dr. Yun says the nation's housing market has even surpassed pre-pandemic sales. He attributes a lot of that to low mortgage rates and people realizing that working from home means they need more room.

“Because of the strong demand for housing and we have a shortage of homes in the marketplace, so whatever home builders build, they can find a buyer so they build more homes. But one of the constraints is lack of construction workers along with the material cost that goes into construction, such as lumber,” says Dr. Yun, who also pointed out the country's underproduction.

“Home builders have been producing below historical average for 10 straight years and the cumulative effect of underproduction is we don’t have sufficient inventory and that is the reason why home prices are rising and we need to build more homes to get into balance,” added Dr. Yun.

Which is why, Laura Gonzalez, associate professor of Finance at California State University Long Beach, says we're experiencing a supply and demand situation when it comes to wood.

“We just don’t have enough wood,” Gonzalez said. “It's difficult to make it ready and then transport it because of the pandemic. It's not that the industry is changing its just that we have had a shift both in supply and demand.”

Gonzalez also says it's the basic equation of high demand meaning lower supply, which sends prices up and stocks soaring. Then there's the factor of where our wood comes from. She says, “We import some of our lumber from Canada both from lumber and other products. If we depend on other nations, we are more susceptible to changes in supply.”

So, what comes next?

“The issue of supply versus demand is going to correct in two years, but the opportunities for climate finance are ongoing that is not going to finish,” Gonzalez said.

Which is why Dr. Yun says home prices will hold firm, and if you're waiting for a ‘burst’ or for prices to decrease, you might be waiting a while.

“In future years, mortgage rate will certainly rise and that will choke off some of the demand, but hopefully we have adequate supply so we have a more balanced market condition where prices rise in manageable, 3-4% each year and people will feel comfortable at that rate of price appreciation,” says Dr. Yun.

Dr. Yun recommends if you want or need to buy, don't overstretch your budget as the competition is fierce out there. If you want to sell, don't get greedy and overprice because your home will get stuck on the market. It's yet another aspect to this odd year that has brough the unexpected to us all.