By Brent Sohngen, Professor Environmental and Natural Resource Economics, The Ohio State University
In case you haven’t noticed, lumber prices have increased a lot over the last year. Based on the US Bureau of Labor Statistics Lumber Price Index, which you can find here, lumber prices have increased 180% since April 2020. This increase started last fall and has continued ever since. So, why have they risen, and how high will they go?
Let’s start with the first question, why have they risen? The economic explanation is relatively straightforward: Demand rose rapidly due to pandemic-related building, and supply is really inelastic, as we say in economics. Thus, while the demand for wood has increased dramatically, the supply of wood hasn’t been able to keep up. Let’s break this down.
Consider the demand side first. The construction sector, specifically building and remodeling houses, is one of the largest demanders of lumber in the US and around the world. New home starts and construction spending cratered at the beginning of the pandemic, but they rebounded pretty quickly. Remodeling in particular seems to have picked up a real head of steam.
While demand for new construction and remodeling is hot, it’s actually now at about the same level as before the pandemic. So something else must be going on. One of those something else’s is the price of steel, which has also increased dramatically in the US. Steel is a substitute for wood, especially in commercial construction, and rising steel prices have also driven up demand for lumber and other things that can be made out of wood or steel. Continue reading