High lumber prices force builders to delay - Capital Economics
US Housing

High lumber prices force builders to delay

US Housing Market Update
Written by Matthew Pointon
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Record high lumber prices are leading to delays in housing starts, and as result the share of homes for sale that have not been started reached a record high in January. While that will constrain single-family starts in the short term, sales of homes that have not broken ground have seen strong growth in recent months. That will support building later in the year as overall housing demand falls back. We expect starts will average 1.21m in 2021, up 21% compared to last year.

  • Record high lumber prices are leading to delays in housing starts, and as result the share of homes for sale that have not been started reached a record high in January. While that will constrain single-family starts in the short term, sales of homes that have not broken ground have seen strong growth in recent months. That will support building later in the year as overall housing demand falls back. We expect starts will average 1.21m in 2021, up 21% compared to last year.
  • One striking aspect of the January new home sales report was a surge in homes for sale that have not yet been started. At 83,000 after seasonal-adjustment, the number for sale was as its highest since mid-2007, and up 42% compared to a year earlier. (See Chart 1.)
  • A jump in for sale inventory is usually a bad sign, as it implies home sales are declining. Indeed, the last time we saw a similar rise in inventory was in late 2005, ahead of the financial crisis. But new home sales were up 19% y/y in January, so faltering demand is unlikely to be driving inventory higher. Moreover, a key difference this time around is that the inventory of completed and under construction homes has not seen a similar rise. As a result, the share of homes that have not been in started in total new home inventory has risen to 26%, the highest since records began in 1973. (See Chart 1 again.)
  • Rather, instead of issues on the demand side, we suspect the rise in not-started inventory reflects constraints on the supply side. In particular, lumber prices have surged in recent weeks, reaching an all-time high of over $1,000 per 1,000 sq.ft. last week. Homebuilders may therefore be delaying starts and have shifted to selling homes before they have broken ground. Indeed, rising lumber prices in the past have been associated with an increased share of not-started homes in total inventory. (See Chart 2.)
  • That provides clear evidence that lumber is constraining production, and as a result single-family starts are likely to underperform relative to building permits over the next couple of months. However, that will provide support for starts later in the year if lumber prices subside. And, given signs of increased production at mills and the recent cut in tariffs on imported Canadian lumber, we expect prices will fall back to around $550 by end-2021. (See Update.) Furthermore, with so few existing and completed new homes on the market, builders have been enjoying strong demand for planned homes. Sales of not-started homes were up 29% y/y in January, outperforming the rise of 17% for all new home sales.
  • With a decent stock of orders on the books, starts are set for a decent rise once lumber prices have subsided. Accordingly, even as overall home demand falls back due to higher mortgage interest rates, builders should be able to maintain production. We expect single-family starts will average 1.21m this year, up 21% on 2020 and the highest number of starts since 2006.

Chart 1: New Homes for Sale that have Not Been Started

Chart 2: Not Started Homes for Sale & Lumber Price

Sources: Census Bureau, Capital Economics

Sources: Refinitiv, Census Bureau


Matthew Pointon, Senior Property Economist, matthew.pointon@capitaleconomics.com