Home prices are accelerating in the U.S., with the average price of newly constructed homes hovering around $400,000. And thanks to skyrocketing lumber prices — up over 300% in the last year — prospective homebuyers want to know if they should prepare for higher prices.
In February, the National Association of Home Builders (NAHB) estimated that lumber prices were adding $24,000 to the average purchase price of a new home. Last Wednesday, the NAHB upped that number to $36,000 — and the price of lumber is up another 10% in that short time.
While it takes some time for home prices to adjust to lumber prices, the good news is that lumber prices may be topping soon, according to John Duncanson, executive vice president of Corton Capital Inc. and timber analyst on the Corton Global Timber Fund.
"I think we're getting to the peak, but the key to watch here is supply," Duncanson said in an interview with Yahoo Finance Live. "We've all seen what's happened to demand. It's actually outperformed what a lot of economists were looking for."
The degree of the recovery has consistently outpaced the expectations of economists over the last year, as the effects of a record spate of expansive fiscal and monetary policies work through the economy. When lumber prices surged to a record high In September 2020, the NAHB CEO Jerry Howard warned that a continued rise in lumber prices would eventually weigh on the housing market in general.
“The dark cloud on the horizon of the single-family side is lumber prices. If we continue to see this type of increase in the prices, or — I’ll make an even more dire prediction — if prices don’t come down, you will see a slowdown in housing,” Howard told Yahoo Finance Live at the time.
Random Length Lumber futures (LBS=F) listed on the Chicago Mercantile Exchange hit a record $1,418.50 on Monday, up 60% from their peak last fall. Duncanson does expect a pullback, but sees a relatively high floor on prices.
"We'll probably get some relief, but I don't see prices dropping too far below $1,000. And then you're going to have to scramble because inventories are nonexistent ... We could see a repeat of  next year," he said. In other words, we could see lumber prices again pushing new home prices higher even if there's a cyclical near-term pause.
But what's bad for homebuyers has led to stellar results for homebuilder stocks. Beazer Homes USA (BZR) surged 6.7% Monday, settling at $23.81 after the Wall Street firm Sidoti raised its price target to $29 from $24. Despite rising lumber costs, the firm is noting that Beazer has pricing power and isn't discounting as much through incentives. That means prices are being passed on to buyers.
Beazer stock is up 240% over the prior 52 weeks, but other homebuilders are putting up even more impressive results. Home Group (HOME) is up 1,208% over the last year, while Hovnanian Enterprises (HOV) is up 1,082%. Larger homebuilders are also rewarding stockholders over the same period. Luxury homebuilder Toll Brothers (TOL) is up 170%, D.R. Horton (DHI) is up 117%, Lennar (LEN) is up 114% and KB Home (KBH) is up 97%. The SPDR S&P Homebuilders ETF (XHB) is also up 118% over the trailing year.
U.S.-Canada trade war
Adding fuel to the fire is a nearly four-decade-old trade war over lumber prices between the U.S. and Canada, which was exacerbated during President Trump's administration. The U.S. Commerce Department reduced the existing 20% tariff on Canadian lumber to 9% from 20%, but that tax is still being passed on to end users and consumers.
Duncanson sees a new opportunity for change, as the NAHB lobbies the Biden administration to reduce the tariff. "I think [the NAHB is] wise in doing so. You'll get a receptive ear from Mr. Biden in that the Americans are still taxing Canadian lumber," he said.
Duncanson believes that getting back to the negotiating table is necessary to spur additional capacity at lumber mills. "[I]t's not going to turn on the tap. But what it will do is it will encourage companies, especially in Canada, to build new capacity — particularly in Eastern Canada where we have the timber supply. Nobody is going to build a new mill if they have got an ongoing trade war with the — with their biggest consumer."
And if that's not enough, the spillover of higher lumber prices can also exacerbate the gargantuan problem of rebuilding America's crumbling infrastructure, as wood plays a critical part in laying concrete.
"[Infrastructure is] going to hurt as well too ... [T]he U.S. does not have the supply of plywood and sheet material that it needs for concrete form work ... I think it would be very positive if they could do something on the trade file because they are going to need Canadian supply," said Duncanson
Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared