Where's the Wood?

Unless you've been on vacation for the past six months, you've been slammed by huge cost increases in plywood, oriented strand board (OSB), and softwood framing. How did this happen?

High market demand, wood diverted toward the rebuilding of war-ravaged Iraq, and the onset of bad weather have resulted in an unhappy, unholy alignment of market pressure on wood prices. The result has been a painful free-market ride, especially for small builders who don't buy their materials months in advance of breaking ground.

In Ft. Thomas, Ky., 4x8 sheets of 1/2-inch plywood increased from $7.50 to $16.40 over a five-month period. In Western New York, it's not just the price of plywood that has builders worried--it's the dwindling supply. In Buffalo, for example, many lumber suppliers have sold out of both plywood and OSB panels, and worry that their next shipment may not arrive for a month.

Worst of all, some builders have actually postponed or canceled contracts due to the lumber situation. An article in the Lawrence Journal-World cited several local builders who have delayed or canceled projects until prices and availability return to sane levels. In Lawrence, Kan., 1/2-inch plywood, if you can get it, now costs $20 a sheet, compared with $7 a year ago. Local lumber providers say that adds as much as $5,000 to a new home.

Don't panic

Easy now, says Michael Carliner, chief economist with the NAHB. "By January [2004], I think it will be all over."

Carliner argues that price fluctuations in building materials are to be expected, especially when a number of factors collude to exacerbate the change. The good news, he points out, is that the primary reason for the high prices is high demand for homes.

Key indicators also give reason for cautious optimism. Statistics from the Bureau of Labor Statistics include a "core" price index, which includes construction materials but not energy and food prices. In the September report, it notes that price increases for plywood, softwood, and treated lumber slowed in the month of August. The softwood lumber index rose by 4 percent in August, and 4.6 percent in July. Despite the slowdown, however, it's still a rise.

Stress points

Along with the major factors of high demand and low supply, other variables have made this lumber crisis worse than any in recent memory. The South has had an exceptionally wet season, making logging roads nearly impassable. Prices of Southern sawn timber have gone up 27 percent.

And remodelers may also be dipping deeper into wood supplies. An NAHB survey of 550 professional remodelers found that they did more business in the first two quarters of 2003 than they had at any time in the previous two years.

Barring other unforeseen variables, economists expect plywood and lumber prices to come back to earth in coming months "In the interim," Carliner says, "builders are in for a bumpy ride."

Ganging Up Here's NAHB chief economist Michael Carliner short list of why plywood and OSB prices have spiked so far, so fast.

1. Strong demand from single-family builders. Single-family housing starts for the first eight months of 2003 were 7.5 percent above 2002.

2. Capacity constraints. There have been only slight additions to OSB capacity since 2001, and plywood capacity has fallen each year since 1999.

3. Log shortages. Fires in the West and rains in the Southeast caused some mills to curtail production during the summer due to lost stock and impassable roads.

4. Insufficient inventories. Mills and dealers kept inventories low through the spring, fearing a slowdown in demand. Hurricane Isabel exacerbated the panic.

5. Military demand. Purchases by the Department of Defense for U.S. military use in Iraq have added slightly to demand. Although the military purchases have been small, they have had a disproportionate effect on market psychology.

6. Industry. A substantial part of plywood demand comes from industrial users, and their orders have increased as well.

Sources: The Cincinnati Post, Random Lengths, The Datadigest