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Vaultedge newsletter - Issue #15 - Caught off guard by the rise in lumber prices?

Vaultedge newsletter - Issue #15 - Caught off guard by the rise in lumber prices?
By Murali from Vaultedge • Issue #15 • View online
Hope all the folks in the Lone Star State Texas are fine. Take the necessary precautions, enjoy the snow while it lasts and don’t blame clean energy for the power outage. Yes, I too am stumped by some commentators blaming the 10% clean fuels in the overall energy mix of the state for the shutdown of power grid. Now, don’t try to find the logic in it; there is none. But we will talk about that in detail some other time.
Something really caught my attention this week. It is the news about the sky rocketing lumber prices. Lumber is a key raw material for house construction in the United States. 80% of the lumber imported into the US comes from Canada. When Covid-19 set in, lumber mills in both the US and Canada closed down disrupting supply. Even when they reopened, trade between the two countries did not catch up. Net result, lumber prices in the US shot up by a whopping 110% from April to August 2020. That adds about $15,000 to the cost of a new home compared to pre-Covid numbers. Things are easing up a bit over the last couple of months but not fast enough. With housing demand continuing to be at record high level, lumber prices will continue to be a key factor in home prices for 2021.
This set me thinking about the differences between the US and other countries when it comes to using lumber in house construction. While it is commonplace here in the US for us to use lumber in house construction, it is not so in other countries. In fact, to my reason US and Canada are the only two major countries that heavily use lumber in house construction. Europe and Asia primarily use masonry based construction i.e. steel, cement, sand and stone. The difference arises from how housing evolved in North America vs rest of the world.
When North America was settled, the vast forests provided a free resource of building material, so wood was the primary construction material used. Even today compared to Asia and Europe, North America possesses large forests which are harvested and used extensively as construction material. Over a period, builders developed the knowhow to build a relatively inexpensive home using wood as their primary construction material. Compared to this, most large forests in Asia and Europe were cut several hundred years ago. There is not enough supply of wood and subsequently the lumber (or timber, as called in Asia and Europe) prices are high. There is a long tradition of masonry in these continents. That is why in the US, we build with lumber where as in Asia and Europe you find houses mostly built with steel and cement.
So which is more sustainable - building with wood or with steel & cement? Looks like the answer depends on whether you have trees in your backyard or not, figuratively speaking. Trees remove carbon from the atmosphere; by cutting them we are reducing the amount of carbon that can be removed from the atmosphere. On the other hand, producing cement and steel takes lot energy and adds CO2 to the atmosphere. So the trade off depends on whether you have enough trees to convert to lumber near you.
In other news, mortgage rates for a 30-year fixed rate loan fell to a new low of 2.65%. So expect the mortgage volume to remain high, inspite of the increase in construction costs from the rise in lumber and other raw material costs.
Talking about mortgage interest rates, do you want to know how the rates went down further and further for the whole of 2020 and beyond? Check out the last article below.
The low interest rate party continues.

How wild lumber prices have crippled homebuilders - HousingWire
Masonry Design: European construction versus North American construction
Swap steel, concrete, and brick for wood – wooden buildings are cheaper and cleaner
Mortgage rates drop even lower to new record of 2.65% - HousingWire
How record-low mortgage rates changed everything in 2020 - HousingWire
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Murali from Vaultedge

I write about the future of mortgages, real estate and automation.

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