Lumber volatility hits 75-year high as inflation soars

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

Not only did the December 2021 Producer Price Index report reflect record-high inflation, it also showed the average 24-month measure of softwood-lumber price volatility has been dramatically higher since January 2020 at 12%, compared to just 0.3% previously.

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

The housing finance industry is used to some volatility in lumber prices from time to time, but the current level is nearly three times as high as the previous record.

“Record-high volatility of softwood lumber prices continues to be as problematic as high prices,” David Logan, NAHB’s director of tax and trade analysis, wrote in the report.

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

The recent gains and volatility in the price of lumber have contributed home inventory shortages that have strained affordability and slowed home sales even though household formation rates are expected to keep driving strong interest in housing.

“Demographic-fueled demand is strong and existing-home inventory, making a new home an attractive option. Yet higher construction costs (labor, lumber, materials) are being passed on to buyers,” First American Deputy Chief Economist Odeta Kushi noted in a recent report.