Hello internet, I’m Jackie Fox and in this video, we’re talking about wood. Working and going to school within the construction industry, I’ve heard a lot about this issue, and the answer is both simple and multi-faceted.
The TL: DR version is that supply is less than demand and therefore the price will increase until either supply increases or demand decreases. The long story will see us questioning how we think about the economics of home building (look at the one-year view for a good idea of how things have changed.)
The first thing you need to understand is that this isn’t a sign of higher inflation due to government spending. A lot of conservatives are applying this argument to discredit the Biden administration’s more ambitious goals, and it’s broadly false, but also specifically false about the lumber market. It’s not a reflection of macroeconomic conditions, but an interconnected series of issues. Somehow, we understood this when toilet paper and hand sanitizer rapidly increased in price, but when it’s something we don’t regularly interact with, it’s not so clear. To those of us who buy wood and wood products regularly, it’s quite a bit more noticeable.
The largest driver of this is the highly unequal way the pandemic has affected us. While many face an economic depression, the upper middle class was largely unaffected by COVID-19’s effects on society. Early on in the pandemic, anticipating trouble in the housing market, lumber prices actually got really low because everyone was anticipating an economic slowdown in the housing market. With people being evicted, it would follow there would be less demand for new homes as these came onto the market.
Many construction companies shut down early on and lumber mills quickly ran out of bulk customers as wood piled up and there was increasingly little for workers to do. All of that would change in an instant, catching the whole industry off guard as interest rates on new homes plummeted, and suddenly the upper class unaffected by the economic unrest decided at once it was time to build a new home. One way of lessening the supply deficit would involve the Fed increasing interest rates to attempt to mitigate this trend. While I don’t think any single solution here is enough, this one may be the most likely to help.
There’s also the effect do-it-yourselfers had on lumber supply early in the pandemic. In that short window of time when people were stuck at home with only their local grocery and home improvement stores open, DIY’ers took advantage of all the cheap wood. As construction companies opened back up, the cheap wood was gone and because of a spike in demand, all new wood was suddenly much more expensive. This is really similar to when home bakers and brewers bought all the yeast and created a shortage that temporarily affected the price and supply of fresh baked yeast breads. I’m not blaming either group for the problem, by the way – I would encourage people to be more self-sufficient, from baking bread to fixing that leak in the roof. As a matter of fact, I happened to be in both groups. Nevertheless, this added to the sudden spike in demand that’s driving prices through the roof.
Speculators play a role here too. Sensing a chance to make money, investors have driven up the price of lumber futures. Given that supply is currently so low, that there’s often weeks to wait for wood for major projects, I suspect futures pricing is more relevant to the sale price of lumber than it would be with other commodities.
It’s also important to think of where wood comes from. There’s already been a longstanding shortage of stronger “old woods” because tree farms make greater profits and can only keep up with lumber demand by growing trees as quickly as they can. On top of the top 10 lumber producing states in the US are California and Oregon, with Washington and Idaho also making the list. You may remember these states from the massive forest fires they experienced last year. This meant a lot of the trees meant to become lumber in the ‘20s burned up last summer.
Trump-era tariffs also play their role here; Canada, as you may not be surprised to find out, has a lot of trees, and exports a lot of lumber, especially to their southern neighbors. Or, at least, they DID, with a 24% tariff placed on Canadian lumber in 2017, which was subsequently reduced to 9% last year. But even 9% creates a significant increase in price. If this tariff was removed, it could do a lot to stabilize price volatility in the US lumber market, but as this is a multi-faceted problem, I hardly expect this to be a silver bullet type of solution. The Biden administration has signaled that they plan to double the tariff.
Looking back another decade, we can see how the effects of the 2008 housing crisis set us up for this, as the experience which was driven by bad loans and grossly inflated demand (sadly not too dissimilar to today’s situation in most respects) ended up driving a lot of the nation’s sawmills out of business. These extra sawmills never had the market support in home buying demand over the last 10 years to start up again, and now that they do, they can’t seem to open fast enough to catch up with the current level of demand for new houses.
So, now that we’ve covered the why of lumber prices, what can we learn from this?
Well, for one, I see an opportunity here to examine a situation where the uncareful application of Modern Monetary Theory could cause inflation (though likely not general inflation). As I’ve said in previous videos on the topic, deficit spending is not a one-way street toward eventual inflation. While a perfect answer to how MMT would interact with inflation is nuanced and must really be made on a case-to-case basis, I think this scenario lays a good groundwork for understanding the do’s and don’ts of deficit spending according to MMT.
Let’s say right now is the moment where Joe Biden decided to address the homelessness crisis through building a lot of public housing. Assuming traditional building methods, this would create an enormous demand on American lumber and would cause the price of lumber to skyrocket even further. This could lead to some level of general inflation if we had to resort to buying a lot of Canadian lumber as well, though the inflationary effect would likely remain mostly connected to lumber. As much as guaranteeing every American a home, this would be a really inopportune time to add more demand onto a weak lumber supply.
That being said, even this is a complex scenario, and it’s not that it couldn’t be done without causing inflation in lumber prices. In the above example, I said “assuming traditional building methods” which implies a very lumber heavy construction process, but a wise administration would see lumber prices and use a different method to make these houses that wouldn’t do as much to add to the supply/demand imbalance. One such way might be to 3-D print the houses using concrete. This is a pretty new building method that makes durable and resilient houses in less time, with less labor, and uses a fraction of the lumber. Unfortunately, roofs can’t be 3-D printed in this way yet because of gravity, but just replacing the walls and floor with concrete is a big step in the right direction. Even the roof could be built with alternative materials that may be more expensive than lumber but may well be more available.
This would also help kickstart the most innovative advance in the construction industry in the last century. I really think this is the way of the future, and not because it’s cool looking or trendy. I think 3-D printed houses will take over in the next decade, and we will be dragged into them kicking and screaming because they’re so much cheaper and easier to make, especially now when lumber costs are making the cost of traditional construction skyrocket. If anything, this lumber shortage will only hasten the 3-D takeover, and I for one welcome our house-printing mechanical overlords.
There’s also a final issue I saved to discuss by itself because it feeds into a larger issue in America. There’s a serious labor shortage in manufacturing and construction, and there has been for a long time. On one hand, it seems not enough Americans are training for skilled positions within the industry, such as that of a machinist. On the other hand, there’s also a shortage in unskilled labor within the industry as well.
As far as factories go, I totally get why and honestly, I’m glad it’s happening, inflation be damned. American factories like the ones I worked in to make ends meet in college pay poverty wages, made even worse because they are often hired through temp agencies that keep all but the minimum wage for your labor all while providing you less benefits than if you actually worked for the company directly, all while demanding such exact and constant labor that some factories actually track the muscle movements of their workers.
Needless to say, this is labor only the most desperate would do for $7.25 an hour. Until they raise their wages, it’s not really a mystery why places like this can’t find entry-level workers. Have y’all tried paying them a decent wage and giving them benefits to make them willing to let you dictate their very muscle movements for eight consecutive hours a day?
As for the construction industry, and skilled trades, I’m not as sure that undervaluing labor makes as much sense. Most construction jobs I’ve seen pay at least $12 an hour for those with no experience in an entry level position. After a few months this generally bumps up to $15 an hour or higher, so it’s not for want of an attainable living wage that people don’t show up to work. A basic living wage is a little low for hard manual labor that might lead to health issues later on down the line, and perhaps with our sadly limited access to healthcare, a lot of Americans aren’t willing to risk their backs for the bare minimum living wage. Even sawmills and lumber houses cite a lack of labor in explaining the shortage of lumber right now – I saw that explanation time and time again.
That said, I think a lot of the same things are true for the many employers currently complaining of a worker shortage. I also think Republicans rather hit the nail on the head when they talk about why they think this is happening, citing a $300 increase to unemployment benefits as the problem. It’s not, but in a way, they are right. If you can give someone $300 and that’s enough for them to realize their job just isn’t worth the pay, that says something absolutely horrifying about the low wages that are so prevalent in this country.
I also think it’s no shock that millennials are being blamed for this. For one, we get blamed for everything, but also, we’re the most economically screwed generation in recent American history. We graduated from college with huge debt and rock-bottom wages. We were told “everyone works these jobs at first,” so when we’re still working them a decade or more later without much in the way of a raise or a promotion, I guess we all decided it was quittin’ time.
I don’t blame us – in fact, I think this is exactly what our generation needs. “Nationwide, Millennials are on Strike for Fair Wages” is a headline I’d delight in seeing grace the front pages of papers nationwide. We needed a moment to breathe, remember what life can be, and say “enough is enough.” The companies many of us work for are the most profitable in the world. All we’re asking is a fair cut of those profits for our labor. We don’t want special treatment; we want the standards of living our grandparents enjoyed.
On the other hand, it seems strange that so many people are buying houses at a time when the median price for a new house has increased nearly 100% in the last year, doesn’t it? Especially while the rest of us are facing an eviction crisis. More homes and rental spaces than ever are sitting empty and in spite of that, the rich are paying to build new homes?
It makes a lot of sense as a hedge against inflation because inflation and especially hyperinflation can make debts like mortgages much easier to pay off. It’s no surprise they think so; while consumption slumped alongside supply in many industries, the finite commodities that are typically consumed only by the rich have increased in price relative to the rest of the market. One such market is investments, and houses in America are often treated as both an investment and a commodity.
To be clear, I’m not just talking about wealthy retirees buying second homes as a nest egg, but increasingly major corporations like Koch Industries are getting into the rental market by gobbling up all available properties in an area, presumably to give them monopolistic control over their prices. As the pandemic progressed and rents went unpaid, wealthy landlords bought out smaller operations and consolidated their power and monopolistic control in some neighborhoods.
Back on the topic of wood though, there are a few takeaways I’d like to leave you with long term: there are both long- and short-term components to the current cost of lumber. Right now, we find ourselves at an intersection of the two. If you find yourself thinking about buying a new home, I highly recommend waiting at least a year for lumber prices to even back out, though this is far from a guarantee.
Being personally LEED certified in green building techniques (ladies and gentlemen, a subject I’m actually qualified to talk about lol), I would also anticipate a sustained event like this pushing more builders to pursue greener building strategies going forward. That might sound unlikely, but green building is often focused on the efficient use of materials by reducing materials and waste through more thoughtful design.
Another component that would help insulate against situations like this in the future would also be aided by the wider adoption of green building strategies, and that’s the amount of materials needed to maintain a house over its lifecycle. This is accomplished in part through making wiser long-term choices in building materials as well as focusing on the long-term integrity of the house’s “envelope” or the barrier preventing air and moisture from making it in. Obviously, this leads to electrical savings, but preventing moisture intrusion means less water damaged wood must be replaced each year in high humidity or hurricane prone areas.
Finally, I think all of this will lead to the adoption of newer, less wood-centered building techniques moving forward. We may think of lumber as being a renewable resource, but it’s not nearly as responsive to spikes in demand as we’d really like it to be. A tree doesn’t give a flying fuck about supply or demand. It will grow slowly and over years and years no matter how badly you wish it would grow faster. This is why I really see the 3-D printing concepts I discussed earlier being the next generation of green construction, especially in flood and hurricane prone areas. Though, for this to really be green, the industry would have to adopt a building material other than concrete which contributes a lot of carbon to the atmosphere. Formulations like hemp based hempcrete exist, but I’m not sure if current gen 3-D wall printers are really designed to be able to utilize it. Whereas trees take time to grow, hemp can be grown rapidly and is renewable.
Update: Since writing this in early May, it seems that lumber prices are finally dropping (though they’re still quite high). Part of the reason for this is that finally consumer demand is starting to level off.