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Lumber Prices Are Still Sky-High. Here’s How That Could Affect Your Homeowners Insurance.

If you’ve walked through your local home improvement store lately, you may have noticed that lumber prices are skyrocketing this year. In fact, the wholesale price of lumber hit an all-time high in May – climbing a staggering 323% since the start of the coronavirus pandemic in 2020.

While there are signs that the market may be starting to cool as the U.S. economy reopens, wood still remains a hot commodity. So much so, that there are even reports of black market sellers and lumber yard heists!

How did all this craziness start? And more importantly, how might it affect you – or your homeowners insurance?

Keep reading to find out.

Where does lumber come from?

OK: We all know lumber comes from trees. And it ends up in hardware stores and lumber yards. But chances are you don’t know the steps that occur in between.

First, someone has to cut the trees. Then, those trees have to be transported to sawmills. After that, the sawmills cut and process the wood, where it’s then shipped to lumber yards.

Sounds simple enough, right? Well, here’s the problem.

Every step in that supply process is what economists call “inelastic.” If it’s been a while since your last economics class, that just means that an increase in the price of a good doesn’t directly correspond to an increase in supply.

So when the price of wood goes up, forestry companies can’t quickly cut more trees. Additional transport companies won’t spring up overnight. And it’s unlikely new sawmills will be built to address a short-term spike in demand.

Which leads to our next question…

Why is lumber so expensive right now?

It all has to do with the basic law of supply and demand.

When demand outpaces supply, you end up with a shortage. And that shortage translates to higher prices. So, why is there a lumber shortage? Like pretty much every anomaly over the past year, we have COVID-19 to thank.

When the pandemic began, there were plenty of people predicting that a housing crash (and a resulting financial crisis) was imminent. Anticipating a drop in demand, many lumber yards offloaded inventory and sawmills slowed production.

Little did they know, the opposite was about to happen.

Low mortgage rates kept housing demand strong. And isolated homeowners went on a DIY frenzy – building decks and renovating bonus rooms to make their homes more pleasant for quarantining.

Instead of going down, demand increased. And because lumber suppliers are unable to meet all this extra demand (as described above), prices have continued to go up.

What is the average price of lumber?

Like any commodity, it’s hard to put an exact number on the price of lumber. But most news reports cite the industry group Random Lengths, which publishes a composite index that averages the prices of the most commonly used types of lumber.

Their data is calculated into the price of wood per thousand board feet. Board feet is a measure of volume of lumber. Simply put: One board foot is how much wood is in a board that’s one inch thick, one foot wide and one foot long.

According to Random Lengths data published by the Wall Street Journal, the average price of lumber between 2015 and 2019 remained steady in the $300-400 range. But in 2020, those numbers climbed drastically.

By May 2021, lumber reached an all-time high of $1,711.20 per thousand board feet. Since then, prices have declined to settle around the $1,000 level. But that’s still a substantial increase from a few short years ago.

Of course, you probably don’t buy lumber by the thousand board feet. And neither do I. But the prices you’ll pay at the local hardware store will generally reflect these increases. (From my own experience as a DIYer, I can tell you that the price of an 8-foot 2×4 was around $2-3 before the pandemic. But today, that same piece of lumber is $8.37!)

When will lumber prices go down?

According to the latest market data, lumber prices have already started to decline.

This is a good signal that the bubble may have burst. But even as prices drop below the $1,000 threshold, experts warn it could take years for lumber to reach pre-pandemic levels of around $400 per thousand board feet. So you can likely expect to pay more for the immediate future.

How does the cost of lumber impact home prices?

According to Modular Today, framing is the most expensive part of building a new home – totaling about $28,000 (or 15%) of the building materials and specialized labor it costs for the average new house construction.

When lumber prices jump as drastically as they have over the past year, those increases get passed along to the consumer. In fact, CNBC reports that lumber prices have added $36,000 to the price of building a new home over the past year. And that’s when – or if – builders can get the inventory they need.

But it’s not just new homebuyers who are bearing this burden. The shortage of new homes has also been credited for fueling the increase of used home prices.

Home insurance and lumber prices

There are a few obvious implications for these sky-high lumber costs. First, if you’re planning to buy a home in the near future, you should expect to pay more. The same is true for any home improvement projects that require wood materials.

But there’s another less-apparent way lumber costs may impact you: through your homeowners insurance.

Let’s say you have a homeowners insurance policy with a coverage amount of $200,000. This is the amount that you and your agent agreed to that reflects the best estimate of what it would take to rebuild your home after a total loss.

If you needed to file a claim this year, the cost of lumber would be significantly higher. And due to no fault of your own (or your insurance agent), your home could end up being underinsured. If you had to rebuild your entire house, where would that additional $36,000 come from?

Depending on your homeowners policy, you could be left to foot the bill.

But there’s good news for Erie Insurance customers: With Guaranteed Replacement Cost1, ERIE will pay to rebuild your home without limiting it to the amount of coverage listed on the policy. That means if it’s a covered loss and costs run high, ERIE will pay whatever the difference is.

It’s also worth noting that this coverage requires any home improvement over $5,000 to be reported to your agent within 90 days. So be sure to tell your agent about any recent home improvement projects.

Make sure you’re protected.

Uncertainty is part of life, but it doesn’t have to rule your roost. At ERIE, we’ll help you keep an eye on property risks and manage them up front so you can relax and enjoy your home – and your life.

To learn more about how ERIE’s Guaranteed Replacement Cost coverage can help protect your investment, talk to your local ERIE agent today.

1Guaranteed Replacement Cost applies to dwelling and requires home improvements over $5,000 to be reported within 90 days – not available with all policies and in all states. Coverage of costs to comply with laws or ordinances is subject to limits. Depreciation will be deducted until repair or replacement is made. Talk to your local ERIE agent for more information.