Hedging Against The Lumber Crisis

Hahn Loeser & Parks LLP
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Hahn Loeser & Parks LLP

The recent increasing price of lumber may be the single biggest threat to affordable housing in the United States, not to mention the threat it poses to the U.S. economy. Covid-19, which spurred an upsurge in home renovation projects and a drop in financing rates for new home builds, has caused a contemporaneous increase in lumber consumption and decrease in lumber production. This has caused a historical rise in lumber prices, to the point of crisis.

At the outset of the virus, many lumber mills made predictions that home building and other projects would come to a screeching halt and understandably made cuts to staffing and production. Now, however, lumber mills are scrambling to keep up and simply do not have the staff to fill the market demands. Lumber mill employment has only rebounded by about half, while housing construction employment is almost 100% back to normal levels.

While builder confidence is strong with sales and construction projects following suit, there is a shortage of domestic lumber to support the increased demand. This has caused lumber prices to increase by 130% since mid-April of 2020. Increased lumber pricing is driving housing prices up by an average of $16,000.00-$17,000.00 throughout the country, and there is still continued demand for newly built homes.

The U.S. Government is leaning on the U.S. Lumber Coalition to work together to mend the supply chain and increase domestic production, while also seeking trade agreements with Canada and other foreign producers to help alleviate the domestic demand and inflated lumber prices.

But what can be done while politicians politic? Adding escalation clauses to project contracts that contemplate lumber can provide some relief. An escalation clause kicks in when the price of lumber (or another commodity) increases beyond a certain percentage. Once that threshold is met, the increased costs are passed down to the consumer to protect profit margins and ensure project viability.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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