Add one more factor to the rising cost of new housing in the Seattle area: skyrocketing lumber prices.
Nationally, lumber prices have more than tripled in the past year. That can add tens of thousands of dollars to the price of a new house or town house.
In Seattle’s hot housing market, developers say single-family home buyers so far are still willing to pay. For apartment buildings and affordable housing, the math is more difficult. Rents in the city have dropped in the year since the pandemic hit. Limited funding for affordable housing squeezes those budgets tighter.
Nonprofit developer Bellwether Housing, which plans a 186-unit apartment complex in the Rainier Valley, in December expected framing lumber to cost $1.49 million. Now, that’s up by $850,000, a 57% increase in lumber costs, said Richard Loo, Bellwether’s director of real estate development.
At the other end of the housing price spectrum: At a subdivision by Terrene Homes just outside Kirkland, where prices for new homes are around $2 million, lumber costs are adding $40,000 to $50,000 to the price of each house.
In between, at a Bothell development of 11 town houses, lumber prices doubled from the time construction started in early 2020 to October, when framing began, said Cameron McKinnon, director of acquisition and development at Gamut360 Holdings. That’s added about $30,000 per house and 10% to the project’s overall budget, driven mostly by lumber, he said.
So, are rising lumber prices the reason homes are so expensive in the Seattle area? Not exactly. Fewer than one in five homes for sale in the metro area are new construction. Record-high home prices here have been driven by a slim supply of houses, and cities all over the country are seeing a similar trend.
“If it wasn’t materials, it would be some other bottleneck because demand is just so high. It’s pretty impossible to meet the demand,” said Redfin chief economist Daryl Fairweather.
But for new construction, budgets are now riddled with question marks.
“We’ve never seen anything like this before,” said McKinnon, who is also board first vice president of the Master Builders of King and Snohomish Counties.
And if costs keep rising, new homes could slip further out of reach, especially in more affordable areas outside Seattle.
“Construction represented maybe one potential relief valve” from rising prices, said Zillow economist Jeff Tucker, “and this is shrinking that relief valve.”
The latest price hikes for lumber come as the costs of other goods like gasoline are climbing too, stirring up worry that inflation could jeopardize the country’s economic recovery.
A storm of factors is driving up the price of lumber.
Early in the pandemic, mills shuttered temporarily, facing shutdown orders and bracing for an economic downturn. The capacity for softwood lumber production fell nearly 16% in the first quarter of 2020, according to one estimate.
“The pandemic began and we thought, ‘Oh my goodness, here comes another Great Recession,’” said Steve Zika, CEO of Hampton Lumber, which owns three mills in Washington, plus others in Oregon and British Columbia, and sells to lumber distributors and home centers.
Hampton closed mills for only about a week or so, but others paused longer, worried demand might plummet, Zika said.
Instead, demand spiked, both among homeowners looking to remodel and among homebuilders. U.S. housing starts this March were up 37% from a year earlier.
Add to that long-running issues in the supply chain — like mills that cut back production or closed during the Great Recession, pine beetle destruction of forests, and a shortage of workers, including truck drivers.
“For the time being, it’s just a classic ‘there’s too much demand for the amount of lumber,’” Zika said.
Timber harvests on state-managed lands in Washington are on the decline amid environmental concerns, but more supply could come from the southern United States and Europe. Hampton is building another sawmill in British Columbia.
Increased supply could eventually drive prices back down, Zika said. “I do eventually expect supply and demand to get in balance. No one really knows if that’s three months away, six months away or two or three years away.”
In the hottest areas of the local single-family home market, buyers are so far still willing to pay.
At that $2 million-a-house Kirkland subdivision, even with a price bump from rising lumber prices, “we have multiple-offer situations on individual homes,” said Wade Metz, partner at Terrene Homes.
For now, “demand has been there,” said McKinnon. “That demand has driven up the prices in housing to cover those cost overruns, but that only works when the demand exists.”
The equation is different for apartment buildings. Rents in Seattle dropped during the pandemic as some tenants moved farther out to save money or get more space.
For affordable-housing developers, who limit rents based on income, margins for extra costs are slim.
The effects of rising costs have been ramping up for Bellwether.
The nonprofit started construction on three projects last year after the start of the pandemic. One, a high-rise, wasn’t affected by lumber prices; for the other two, contractors absorbed some or all of the increased costs using their contingencies, and in one case Bellwether had to pay about a third of the increased cost. Now, Bellwether is grappling with costs for the Rainier Valley project.
To cover the gap, the nonprofit is looking into changes to the project or help from its lender. If that doesn’t work, Bellwether might ask public funders like the city’s Office of Housing for more money.
Looking even farther ahead, “it’s hard to plan,” Loo said. “How much certainty do we need? Are we going to overpay if we lock in our prices for lumber now?”
Market-rate apartment builders could take a pause.
Marpac Construction’s clients have put three market-rate apartment projects on hold so far, about a third of the general contractor’s projects, said partner Sai Chaleunphonh.
The company’s affordable housing projects are still underway, but lumber, concrete, steel and other supplies are adding new costs.
“If it was just lumber, then it’s not a huge cost,” Chaleunphonh said. Add the other costs and “it becomes a 15% increase.”
Remodelers see price spikes, too
Homebodies working on remodeling projects during the pandemic have noticed the price hikes, too.
“Customers are obviously shocked,” said Mike Dunn, CEO of Dunn Lumber, which operates building materials stores across the region, “but it’s amazing how few are walking away from projects.”
Prices for 2x4s and similar products have tripled from a year ago. The price of oriented strand board is about eight times higher than a year ago, he said. (OSB is a combination of wood and resin, similar to particle board or plywood.)
“We’re not having people ask for the price and then leave the store … They gulp and usually make the purchase.”
“This is my 50th year” in the industry, Dunn said. “I’ve never seen the market anything like this … It’s just astounding.”
For homebuilders, a lumber supplier can typically offer a price and stick with that price for 30 or 45 days, McKinnon said.
“When things really started to take off in the later part of 2020, we were getting proposals from our lumber suppliers that said, ‘This is good for three days.’”
To offset skyrocketing costs, developers could change how they do things.
For a planned Capitol Hill apartment building, Cascade Built developer Sloan Ritchie said his firm is exploring using other building techniques and materials, like cross-laminated timber and prefabricated steel panels, to see how the cost compares to lumber. “All options are on the table,” Ritchie said.
“We’re trying to be creative and innovative, but we’re not stopping development or stopping building,” he said.
At another firm, Walsh Construction, “We’re looking at: Do we switch to concrete? Do we switch to metal?” said general manager Elizabeth Rinehart. “Is there any way to use less wood?”