Timber volatility hits 75-year excessive as inflation rises

Lumber prices are lower than at their peak during the pandemic; but the associated volatility is the highest it has been in at least three-quarters of a century.

The December 2021 Producer Price Index report not only reflected record-high inflation, it also showed that the average 24-month measure of softwood price volatility since January 2020 was dramatically higher at 12%, compared to just 0.3% previously.

The metric, highlighted in a new report from the National Association of Home Builders, shows how drastically the combination of supply chain disruptions, tariffs and labor shortages has disrupted the pricing of a key material used in single-family home construction.

The mortgage industry is used to some volatility in timber prices from time to time, but the current level is nearly three times the previous record.

"Record high volatility in softwood prices continues to be a concern, as does high prices," wrote David Logan, NAHB's director of tax and trade analysis, in the report.

The producer price index value for softwood lumber was 383 in December last year, up from 309 the previous month and 340 a year earlier, in line with an unusual rise that began last fall. However, the softwood index is still well below the May 2021 peak of 581, according to PPI data compiled by the Federal Reserve of St. Louis. Just before the pandemic, the index's average value was around 200. The index's benchmark of 100 corresponds to 1982.

Recent gains and lumber price volatility have contributed to housing stock shortages that have weighed on affordability and slowed home sales, although household creation rates are expected to continue to generate strong interest in housing.

“demographic demand is strong and the stock of existing homes makes a new home an attractive option. Still, higher construction costs (labour, lumber, materials) are passed on to buyers,” noted Odeta Kushi, First American Deputy Chief Economist, in a recent report.

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