We’ve all been trying to make sense of the past year with its wild swings. From the doomsday outlook of early COVID a year ago to the gold rush mentality of 2021 with extreme shortages of everything from raw material to luxury items and the wild price swings that a shortage creates. If you ever wondered what the 1920’s must have felt like this could give you a hint....unbridled, irrational exuberance with a disregard for market sense.
My grandfather who did experience the 1920’s said that a sign of economic euphoria was certainly when the elevator boy wanted to give him tips on which stock to buy. 100 years later, we are in a different but similar Roaring 20’s. This one has some interesting parallels to that of 1920. Both periods, 1920 and 2020, followed a pandemic. In 1920, America lost 675,000 lives to the Spanish Flu. Today, America has lost 585,000 to COVID-19. The Roaring 20’s really got off to a start in July of 1921 after the post WW1 recession ended and the economic boom began. In the 1920’s technology breakthroughs gave us refrigerators instead of ice boxes, washing machines, radios, and mass production techniques that opened up the US consumer to a dazzling array of products. It was a time of technology triumph.
In 2020-21, we have had huge advances in technology, computing, and communication. The COVID-19 vaccines have been developed in record time, and meetings will never be quite the same thanks to Zoom and other meeting platforms. The Cloud has pushed computing to new heights and given access worldwide.
There is a similar exuberance to the current market in which pent up demand has pushed prices and availability way out of normal range on everything from microchips to minivans.
“But what is up with the price of lumber?” is the question that we are asked multiple times daily. The answer is simply that one year ago, we were all convinced that the economy was more likely to shut down due to COVID, than it was to flourish as it has. Mills and manufacturers braced for the threat of a recession by reducing inventories, laying off or furloughing workers, and reducing capacity. As we all know now, consumer demand went the other direction and increased. Consumers confined to home and unable to travel started fixing up their homes, buying materials, and created shortages of pressure treated lumber, as they built decks last summer to support outdoor living at home. Roofing followed as a category where supply outstripped demand. The roofing manufacturers went to allocation and limited their offerings to only 6 colors in limited product lines. The same has happened with cedar shingles, both white and red cedar. Think of a shingle mill in which one case of COVID can shut down the entire facility for cleaning or in which workers who worry about COVID risk or have child care issues, simply stay home. These same challenges ripple through distribution channels, transportation, and shipping plus government limits of hours of service behind the wheel in trucks limit labor availability. All these factors contribute to an undersupply to meet the over demand. Prices go up as costs go up.
The second question we are asked is, “when will prices subside?” By any normal market measure, they should have already. Typically, bull markets in lumber run for a few months and then cool off. The answer is that every market comes off in the face of consumer resistance. When buyers stop buying, the market corrects.
One theory is that after a “brush with death” as COVID has felt like to so many, that consumers feel the relief of survival and a sense of urgency to act now before it’s too late. That is what fuels inflation. People don’t want to wait, despite the cost. Historically, no market run has sustained itself over the long run. When you were paying close to $5 per gallon for gasoline at the peak in 2012-13, did you ever believe you would pay under $2 as we were in 2020?
So the question is not if the lumber market will retreat from its current record levels, it’s a matter of when. We are 180 degrees from where everyone thought we would be a year ago. When asked to explain the market behavior, I say that it can be done in two words...“toilet paper”. If there is a poster child for unpredictable consumer behavior and resulting market run up and shortages, it can best be described by what happened with toilet paper in 2020. Ultimately the great toilet paper scare worked its way out. This lumber market too shall pass. In order to do so producers have to feel enough price resistance that they get nervous. Supplies will catch up and the consumer frenzy that drives market madness will settle down. God Bless the free market. In the meantime, we apologize for the wild ride. None of us enjoy the rollercoaster trip! The best advice we can give you is buy it when you need it and don’t think you can outsmart the market too often. There are container loads of latex gloves and hand sanitizer around that can be bought for a fraction of their cost that was paid last fall when people were trying to outsmart that market.