Rising lumber prices are putting the wood to local homebuilders who are still smarting from the industry’s worst downturn in decades.

The National Association of Home Builders says lumber costs hit a four-year high in February, although prices have been coming back to earth in recent weeks.

Citing numbers from Random Lengths, a Eugene, Ore.-based tracker of lumber prices, the NAHB says the composite cost of lumber as of Feb. 19 was $317 per 1,000 board feet, up 26 percent from the start of 2010 and the highest number since July 2006.

As of March 5, the price leveled off a bit at $303 per 1,000 board feet. Still, prices are up from historical markers, and “it’s just another blow for the builders,” according to Bernard Markstein, a senior economist with the National Association of Home Builders.

“It’s not like they are sitting on fat margins,” Markstein said in a phone interview. “In some cases, they are building less than break-even or even at a small loss,” so any price increase “is a kick in the teeth to them.”

Decreased production in lumber mills, cold and wet weather in the southern U.S., higher demand from paper mills, and fees on lumber from Canada are among the market forces that are driving prices up, according to the NAHB.

Advertisement The national trends are consistent with what’s happening in Minnesota, according to Mike Swanson, Minnesota Division vice president and corporate risk manager for Rottlund Homes.

Lumber mills have significantly curtailed production and have had longer periods of inactivity for the past year and a half or so, Swanson noted, while activity in the homebuilding industry has picked up in recent months.

“People are starting to build more across the nation. It’s simple supply and demand,” Swanson said.

The result: Builders are paying up to 50 percent more compared with when the prices were at their low point, Swanson said. He said that adds $1,500 to $2,000, on average, to the cost of a multifamily unit, and the impact on single-family prices is “pretty much double that.”

Tim Liester, branch manager at Lyman Lumber Co. in Chanhassen, said the tax incentives for homebuyers are creating “front-loaded demand” at a time when lumber inventory levels are down and production has been curtailed.

Inventory levels down

Inventory levels have been ramped down at lumber mills as a result of the housing downturn. There’s enough capacity in the system, Liester said, to accommodate about 600,000 housing starts at an annualized rate, down from a peak of 2 million.

Liester sees more volatility in prices of commodity and specialty items for at least the first three quarters of 2010. One thing that bears watching is what happens this summer, after federal tax credits for new and existing home purchases expire.

“The unknown here is what happens in July and August,” he said.

Ken Simonson, chief economist for the Associated General Contractors of America, said the trend in lumber prices is consistent with what has been going on with a broader range of building materials, including gypsum, copper and steel.

He said the lumber price increase reflects a combination of an actual rise in demand and anticipated demand.

“There is a strong upward trend in starts and perhaps more significantly in the permits being taken out, which is generally a reliable indicator of housing that will be started in the near term,” he said.

“As we head toward spring and the traditional home-building or home-buying season, I would expect quite a spike in lumber prices” if permits continue to rise.

With material prices going up in both residential and nonresidential construction, it’s a good idea to build now rather than later, he said.

Contractors have been bidding “fiercely” for projects and have lowered their bids to “eliminate virtually all or maybe all profit margins,” Simonson added. “But that is not a situation they can continue indefinitely, particularly if their own costs are going up.

“Even labor costs appear to be going up modestly; they are not getting a break on that.”

Kermit Baker, chief economist for the American Institute of Architects, said it’s not a surprise that lumber producers have been taking a step back, because they couldn’t keep operating at full capacity amid the declines in home construction.

The question is how quickly they can ramp up to adjust for the rebound in housing, he said.

“My take is that the housing market is still quite vulnerable. It has been in recovery for about a year, but it has been a fairly modest recovery so far,” Baker said.

“The sector that seems to be bringing the market back is affordable, first-time buyers. That is a sector that obviously is very price sensitive. … It would be unfortunate for higher prices to be a cause of a slowdown in the housing recovery.”

Markstein builders want mill operators to get a fair price.

“But if we can’t recoup this cost, if our guys go out of business,” he added, “who is going to buy the wallboard?”

Framing lumber composite price (per 1,000 board feet)

March 5, 2010    $303

March 5, 2009    $197

Source: Random Lengths