2021 new house builds hit the highest they had been since 2007. Interest rates dropped to historical lows by the end of 2020 reducing monthly mortgage payments and lead to another spike of qualified buyers. This further increased the demand for lumber. This due to both the lack of inventory due from lower build numbers and the influx of buyers on the market. In the fall of 2020, we saw permit approvals and new home starts increase. Having saved money, traveled and attended college, they are now ready and buying their first homes. Millennials, the largest generational group of the US, also entered the housing market. Still maintaining their current jobs, the removal of the daily commute opened up options. Working from home also allowed people to realize their dreams of moving to new locations. With parents and children sharing space at home for work and school, many across the nation started looking for larger homes. Building decks, adding fences, creating “she-sheds”, and the likes, increased the demand for lumber. When the pandemic hit this last year, people not only began working from home, but began filling their time with home improvement projects. Eleven years of reduced staffing, both in the sawmills and the number of drivers previously employed to transport both finished and unfinished wood/lumber to and from the mills, are one of many factors contributing to the lumber shortage and cost increases. With the slow down of builds, sawmills reduced the production to match demand. This has created a compounded shortage of close to 5 million homes. Since the end of the Great Recession of ’07-’09, housing starts have dropped to average only about 1 million homes a year. The average home build start from 1960 to 2010 was 1.5 million homes a year. The benefit of this paper is that we have identified a few pieces of readily observable information that allow people in the timber industry to make solid predictions about what will be happening in the next six months or so.Historical Housing Starts – Source: / US Census Bureau "It can feel like feast or famine in this industry but there is a logic that underlies the changes. "Right now log prices are phenomenally high," Reimer said. The National Association of Home Builders recently released a report that said lumber prices have added an average of $24,000 to the cost of a new home. Since the paper was written, lumber prices have increased more, reaching the $1,000 per MBF range. The difference between the minimum and maximum was $578, nearly as large as the 15-year average price itself. From 2005 to 2020, the price ranged from $346 per MBF to $924 per MBF. Yet this average disguises a great deal of variation in price. One board foot of lumber is 1 square foot and 1-inch thick. In the paper, Reimer cites data that shows the average price of Douglas-fir logs between 20 was $631 per MBF (a forestry term for 1,000 board feet of lumber) of mill logs in southern Oregon. "These variables are readily observable and thus can be used by industry decision-makers to make better predictions about future values of logs and timberland," said Reimer, a professor in Oregon State's College of Agricultural Sciences. Adding additional information - including the monthly inventory of homes, mortgage rates, the exchange rate with Canada (also a big timber supplier) and the Case-Shiller home price index - explains about 74.3% of the price variation. He found that simply knowing the number of housing permits issued in a month can explain about 46.8% of the variation in log prices over time. Reimer's study, recently published in the journal Forest Policy and Economics, focused on Douglas-fir, the most commercially important timber species in the Pacific Northwest. Yet the prices of cut and delivered logs may be the most direct way to monitor the condition of timber markets, Reimer said. The health of the timber industry can be measured in various ways, including harvest levels, employment in timber harvesting and at mills, and lumber demand. The timber industry is critical to the economy of many regions of the world, including the Pacific Northwest. "That makes this a difficult business, whether you are land manager, mill owner, timberland investor or, as we are seeing now, a home builder." "Log prices are really variable," said Jeff Reimer, a professor of applied economics at Oregon State. At a time when lumber prices are skyrocketing, an Oregon State University researcher has developed a new way to predict the future price of logs that uses readily accessible economic information.
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