‘The lumber crisis isn’t over’: Some homebuilders are declining to build until wood prices fall further

Since peaking on May 28 at $1,515 per thousand board feet, the lumber composite price has dropped 44%, to $853 as of Tuesday, according to the trade publication Fastmarkets Random Lengths. Eventually, this decline will result in a markdown of two-by-fours at big-box retailers like Lowe’s and Home Depot. But unlike DIYers, homebuyers won’t be so lucky on the pricing front.

While lumber’s price is falling, it’s still up 138% from spring 2020, and industry insiders tell Fortune we shouldn’t expect pre-pandemic prices—when it hovered between $350 to $500 per thousand board feet—for years. Indeed, those levels may never return. And still-exorbitant lumber prices, coupled with the uncertainty of where prices are headed, explain why builders aren’t lowering prices on new homes.

Some builders are even refusing to take on new projects. That includes Jerry Konter, owner of Konter Quality Homes in Savannah. His firm usually builds around 50 homes per year. But as a result of sky-high prices, the company he’s operated for 44 years has stopped taking new orders and temporarily halted building.

“The lumber crisis isn’t over. I’m not writing contracts right now until we get some idea of where we’re going,” Konter tells Fortune. When that time comes, he says, he’ll still limit his risk by having buyers sign “lumber escalators.” Those provisions put buyers on the hook if lumber prices rise between the time they put down their earnest money and when it comes time to frame.

The reason? Profit margins. Builders have only so many available lots to build in, and they’d prefer to save those lots for times when lumber isn’t eating away at their profits. Konter says the high price of lumber and other materials has decreased his margins by three to four percentage points. That’s a steep drop for an industry that operates around a 15% profit margin. The pain isn’t just coming from lumber: The price Konter pays for sheets of OSB, used for flooring and walls in new homes, is up from around $8 per sheet to over $50.

Konter isn’t alone. Riding the boom in the housing market, new home construction climbed to a 14-year high in March. But the historic run on lumber, which saw July contracts climb above $1,700 in early May, caused some builders to pull back or put projects on hold. Indeed, housing starts in May were 8.9% lower than levels in March. Slowdowns by homebuilders like Konter help explain why lumber prices are falling now: Demand finally softened—a bit.

For buyers, this is a terrible time for builders to slow down. Since the onset of the pandemic, the number of homes for sale is down 51%, according to realtor.com. Limited options mean that buyers either have to engage in bidding wars or simply walk away. The frenzy has resulted in a 15% year-over-year uptick in the nation’s median list price for homes on realtor.com. More homebuilding could help to alleviate that shortage and relieve upward pressure on prices.

The burning question for builders is, Where are prices headed from here? Last week Stinson Dean, CEO of Deacon Lumber, told Fortune the dynamic that led to the historic lumber squeeze in the spring has already played out—and is unlikely to happen again. That squeeze, he says, was largely driven by vendors rushing to buy spring and summer inventory that they were contractually obligated to fill for builders. While the worst of the lumber crunch might be behind us, higher prices could last for years. Andy Goodman, CEO of Sherwood Lumber, says he expects high lumber prices to remain for another one to three years.

Elevated prices are likely to stick because the economic pressures that drove higher prices in the first place are still here: constricted supply, and strong demand. Even with the recent dip, new home construction is still quite strong. Indeed, new housing starts in May are up 20.6% from May 2019 levels and 50.3% from May 2020.

As Fortune has previously reported, this historic lumber shortage was spurred by a perfect storm of factors set off during the pandemic. When COVID-19 broke out in spring 2020, sawmills cut production and unloaded inventory in fears of a looming housing crash. The crash didn’t happen—instead, the opposite occurred. Americans rushed to Home Depot and Lowe’s to buy up materials for do-it-yourself projects, while recession-induced interest rates helped spur a housing boom. That boom, which was exacerbated by a large cohort of millennials starting to hit their peak homebuying years, dried up housing inventory and sent buyers in search of new construction. Home improvements and construction require a lot of lumber, and sawmills couldn’t keep up.