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Impact on consumers, homebuilders as lumber prices fall to pre-pandemic levels

Impact on consumers, homebuilders as lumber prices fall to pre-pandemic levels, SOURCE: ABC 33/40 News{p}{/p}
Impact on consumers, homebuilders as lumber prices fall to pre-pandemic levels, SOURCE: ABC 33/40 News

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The price per 1,000 board feet of lumber has dropped to pre-pandemic levels by the end of the first week of the new year. In March 2022, the price of lumber was around $1,460. On January 6, 2022, prices fell to $354.

Consumers may not see the entirety of the drop reflected at retail home improvement stores immediately. There could be several factors at play.

"There's some stickiness in the market that makes retailers not automatically adjust," said Ben Meadows, an assistant professor of economics at UAB. "It could be that some of these lumber purchases were at those former prices. Whatever store you are talking about is unwilling to take the haircut on the lower prices."

With more expensive inventory on shelves, Meadows explained retailers could be trying to avoid a loss on their end.

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Demand plays a role as lumber is typically linked with future housing market indexes.

"Raising interest rates to try to cool the economy is really going to zero in on one special location and that's mortgage rates and since mortgage rates control housing purchases, that slows down the housing market and that slows down the home purchasing and home builder sector. What is one crucial input for the homebuilding sector? That's lumber...It is slowing down the housing market which is putting a little more slack in the lumber market which is lowering prices," explained Meadows. "There's kind of a push and shove here. The one response that producers can try to get consumers to buy more, in this case, lumber, is to cut prices to try to get folks to come in and buy but again if they are holding onto lumber that was procured at a higher price, they are going to be really hesitant to do so."

Another reason retail consumers wouldn't see lower prices could be a lack of pressure from consumers.

"Those price resets haven't trickled all the way to the bottom yet and there hasn't been a lot of pressure to lower those retail prices," said Meadows. "If retail purchasers aren't putting pressure on those prices, from a very boots on the ground, customer walking out because they know they can get a price lower at another store, there's nothing being communicated to the producer, in this case, retail stores, to lower their prices."

Without pressure from the consumer, there's no reason to lower prices.

"If folks are buying at a higher price then why would you lower your price," said Meadows.

He compared the lumber market to the oil industry when prices rise.

"When there are supply cost increases for a retail gas chain, they're not going to take a haircut on their profit margins. If a unit of oil goes up by a dollar they've got to pass that on to the consumer or they are going to be taking a loss," said Meadows. "Once cost increases start to come down a little bit, there's no incentive to lower your price at a gas station until you notice other folks doing the same thing. It may be a bad metaphor for lumber, but that metaphor of 'up like a rocket and down like a feather' seems to hold true in a lot of segments of the economy."

Consumers could wait for retail prices to normalize, but there's no harm in comparing prices.

"Markets run on folks being well versed in the prices of things. Folks doing a little bit of research. finding a deal somewhere else, there are always returns to looking for more information or more prices when it comes to something like this," said Meadows.

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Although retail consumers may not see an immediate impact, lower lumber prices are a good sign for homebuilders, and in turn, home buyers.

"You'll see some moderation in pricing because lumber is such a large and integral part of the construction of a new home," said Russell Davis, Executive Vice President of the Home Builders Association of Alabama. "As pricing goes in the new home market for lumber and wood materials it is much much better than it had been."

Although encouraging, there are other factors keeping prices high.

"You've got pricing on other products and materials that have not moderated, i.e. ready mix concrete, sheetrock. Just about every builder in our area has been hit with double-digit increases over the last six to nine months on just those two materials alone," said Davis.

The market continues to be tough for homebuilders, but Davis said the HBAA is staying positive in the new year.

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"We are excited about it from a home building industry. We are hopeful that we will see interest rates moderate this year so it makes it more attractive for folks to be in the market for a new home. We're excited about those opportunities," said Davis.

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