One of the pandemic's biggest booms has finally gone bust

What see-saw prices for wood tell us about America's economic future.

A handful of products define the collective memory of the pandemic's early days. There were the weeks that toilet paper flew off the shelves, to the point you had to barter for more than a roll or two. For a while, everyone was buying yeast, because it seemed critical we all bake sourdough. And then there was lumber mania, when lumber prices soared to records.

Once we all were cooped up in our homes, many people looked around, realized they hated their abodes, and decided it was time to make a (sometimes drastic) change. This meant a lot of moves, even more makeover projects, and a whole lot of lumber. Unfortunately for the motivated remodelers, the supply side of the equation was caught flat-footed: Sawmill operators had scaled back operations under the assumption the pandemic would mean less activity, not more. The price of Western SPF two-by-four lumber — an industry benchmark — shot up from under $400 per thousand board feet in January 2020 to over $1,600 in May 2021.

But what comes up often comes down, and lumber prices came down hard as demand decelerated and supply ramped up to a speed that's no longer necessary.

"It's low and slow, and it's kind of been that way for a while," said Stinson Dean, the CEO of Deacon Lumber, a lumber trading company.

After peaking in spring 2021, lumber prices briefly collapsed before jumping back up to $1,400 in early 2022. Later that year, prices nose-dived to the $300-to-$400 range, and they've stuck there. While these prices are similar to the pre-2020 levels, Dustin Jalbert, a senior economist on wood products at Fastmarkets RISI, told me that changes to the industry and the higher cost of production meant lumber suppliers were getting squeezed.

"A large part of the industry is losing money at these prices right now," Jalbert said. He joked that lumber was having another "moment" in the media, "but for the opposite reasons."

Supply and demand were the culprits when prices were soaring, and they've helped fuel the tumble, too. Let's start with the demand side: The Federal Reserve has jacked up its key interest rate over the past few years, bringing mortgage rates along for the ride. The average 30-year mortgage rate was under 3% just a few years ago but now sits at about 7%.

High interest rates mean less housing is being built, and existing-home sales are down to levels not seen since the Great Recession. If you own a home and are looking to move, the idea of doubling your mortgage rate is a tough pill to swallow, leading people to stay put.

Remodels and repairs have also slowed down. A lot of activity was pulled forward during the pandemic — those who wanted to build a new deck or an addition already did so in 2020 and 2021. Even if people do have projects they'd like to undertake in their homes, they're not really jazzed about tapping into their home equity to do it, given interest rates. Homeowners also tend to do the most work on their houses within a few years of buying them, so if they're not moving, they're not renovating either.

Paul Jannke, a principal at Forest Economic Advisors, said this housing-market malaise is a big problem for the lumber industry. He said residential construction — including new builds, renovations, and repairs — makes up 70% to 75% of actual lumber consumption. Housing starts are down 18% from where they were in the first quarter of 2022 to the first quarter of 2024, and spending on residential improvements are off by 21%, adjusted for inflation, he said. Given the weakness there, you get the demand issue.

On the supply end, the long and short of it is that producers got a bit out over their (wooden) skis. The amount of lumber being produced might have been nice in 2021, but not so much now.

Those pandemic-era high prices got a lot of people investing in sawmills (aka the place where a tree goes to become a stick of lumber), particularly in the southern US. Some have closed, but on net, US sawmills are producing about 4 billion more board feet than they were in 2022, Jannke said. It's not just an American problem: Suppliers in British Columbia have historically exported a lot of wood to China, but the Chinese property market has collapsed, so that lumber isn't being shipped overseas and instead is being diverted into the already swamped US market. Tariffs on lumber coming from Canada into the US are expected to increase this summer, so Canadian mills are keeping maintaining production before that happens.

"There's so much wood," Jannke said.

Some of this is a classic bullwhip effect, a phenomenon where changes in consumer demand cause outsize fluctuations in the supply chain. It's also classic greed — people saw lumber's eye-popping prices in 2021 and 2022 and decided it was time to get in on the production game or build out existing operations.

"A lot of people got optimistic," Jalbert said. "The thing to think about is the lead time to start up a sawmill. It takes two to three years to ramp up that supply — let's call it 18 to 24 months from breaking ground on the project to when it is fully ramped up to full capacity."

All that new production capacity became operational right as things started to turn.

"There was a lot of investment in new supply that was planned before COVID, and then that was supercharged during COVID," Dean said. Some of those projects were paid for with cash, but others were financed with debt, and sawmills are still pumping out supply in order to pay those debts. Instead of scaling back and waiting for prices to bounce back, they're stuck producing lumber for a market that doesn't need it.

"They have cash-flow stresses, they've got the debt to service, and they've just got this brand-new facility, so they can't really afford to not have any kind of cash flow," Dean said. "They'd rather lose money and run their new facility."

The path to higher prices likely runs through sawmill closures, but many in the industry aren't ready to pack it in. Some mill operators feel like they've done their fair share to slow operations and now it's someone else's turn. It's a prisoner's dilemma, but for wood. Many lumber producers, like a lot of people, came into the year expecting the Fed to cut interest rates sooner, triggering a new wave of demand. That hasn't happened. Mill operators also remember the experience of not having enough supply to meet a spike in demand, and they know that ramping back up takes time, so they may be hesitating to ramp down.

Long term, there's room for optimism. The US needs to build more housing, so the long-run fundamentals look good, and interest rates are likely to come down eventually.

"Lower interest rates fixes this thing in a hurry, because demand can come back pretty quick," Dean said. He told me that for the moment he's taking it easy, "posting a lot of fishing pictures and waiting for the market to figure itself out," and getting ready to work a lot harder once things get moving again.

While those in the lumber industry may not be having a fantastic time, if you're in the market for lumber, it's a good time to buy. Dean said that if lower prices haven't filtered down to stores yet, he expects them to soon.

"If you've been putting off a remodel for three years, a deck, a fence, right now — and you need to be watching prices — this summer will be the best time to secure materials for that in four-plus years," Dean said.

If you really want to get into the weeds on this — and I suppose if you're considering a big project you do — there is some wonkiness. While framing-lumber prices have come down, the costs of a lot of other building materials haven't. If you're building a deck, for example, the deck planks won't be cheap, though the framing will be. Building a house is still a lot more expensive than it was in 2020. Robert Dietz, a senior vice president and chief economist at the National Association of Home Builders, said the costs of residential construction materials were up by more than 46% since May of that year. They've been roughly flat over the past two years, in part because of the lumber decline.

"Other prices remain elevated for material costs, meaning home prices will remain elevated," Dietz said. The silver lining here is that building a new house isn't as expensive as it could be if lumber hadn't come down — lumber's decline has helped prices stay relatively stable over the past couple of years.

Jannke said that while the lower lumber prices hadn't resulted in lower housing costs, "homebuilder margins are at or near record levels." If you're paying a contractor for your project, they may not be too keen to pass the price savings on to you. They're paying for other factors like labor, maybe wiring and sheeting. They also are running a business where they'd like to make as much money as possible.

"They're not quoting the job lower because the dimensional-lumber price is lower," Jalbert said. "They quote a job because they look at what people's income is at and they look at what home prices are at and they say, no, this is the price for that job, regardless of what the inputs are."

That doesn't mean you have to accept the quote with no questions asked. You can try to negotiate — hey, maybe even show them this article and argue that things should be getting cheaper for them. Or, if you dare, you can always buy wholesale and try to do it yourself.

Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.