As Lumber Prices Spike, Homebuilders Assume the Spotlight Once More

The last couple of years have witnessed a continuing boom in the U.S. housing market, as homebuyers have scrambled to find new domiciles. As it becomes increasingly difficult to find existing homes, potential buyers are turning to new construction in record numbers.

There has been a mammoth transition in the housing market as a result of the dearth of existing homes available. A quarter of the homes for sale are now newly built, the highest percentage ever recorded. Now, prices for both new and existing homes are at historic levels.

Lumber prices are also surging, scoring record highs almost daily. Lumber has climbed 67% since the start of this year and has rallied 340% from a year ago, according to Random Lengths, a wood products industry tracking firm. This increases costs for framing, cabinets, doors, windows, and flooring.

Tariffs on wood saw prices climbing since last year, but that was only catalyzed by the stymying of production due to the pandemic. The thought was that housing demand would fall off as consumers lost income. But instead, after a brief pause, it came roaring back. Homebuilders were caught off guard, as were lumber producers. The move also saw huge gains for homebuilder ETFs like the iShares U.S. Home Construction ETF (ITB), which has gained almost 35% this year alone.

“Clearly, increasing the cost of imports via tariffs does not help the situation,” said Robert Dietz, chief economist for the National Association of Home Builders. “We need to do everything that we can to increase domestic supply, including producing more domestic lumber, as well as resolving the trade dispute. It is matter of housing affordability.”

For new homebuyers, the story is a bit more somber, as lumber prices in the past year have added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB.

Now, some homebuilders are decreasing production due to increasing costs. Still, single-family housing starts were up 41% in March year-over-year, according to the U.S. Census. Builders are still attempting to increase production quickly to meet soaring demand.

“We just have no supply in either the new home or resale market today,” said Sheryl Palmer, CEO of homebuilder Taylor Morrison in an interview on CNBC’s Worldwide Exchange.

“We have seen, over the last four or five months, what I have never seen in my career before, is lumber to move to the level it has,” said Palmer. “We are very anxious to see full capacity back domestically. I think if we can get the full supply on, we can get lumber to level out a bit.”

Other factors that are affecting the new homebuilder market are available land, and the price of copper and gypsum, which are used for piping and drywall, respectively.

“There’s a literal land grab going on as builders are scooping up lots to better match housing supply with demand,” said Ali Wolf, chief economist with Zonda. “The lot supply shortage is real, and it is causing prices to rise and builders to move further into the suburbs.”

Meanwhile, for investors interested in using ETFs to play the housing boom, the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) and the Invesco Dynamic Building & Construction ETF(PKB) are two funds to consider. NAIL is up 117% YTD.

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