Lumber Prices Jump with Housing Market Recovery

Can rising lumber prices create a logjam in the U.S. housing recovery?

ByABC News
December 17, 2012, 7:12 AM

Dec. 17, 2012 — -- With lumber prices on the rise, analysts are watching whether the commodity could cause a logjam in the recovery of the housing market.

Housing prices have risen for six months in a row, according to the latest data from the S&P/Case-Shiller home price index, signaling that the country is recovering from the housing bubble burst about six years ago. Along with the housing market, the logging industry is has also rebounded strongly since the recession, said Robb Granado, analyst with financial analysis firm Sageworks.

Read more: Home Prices Rise Sixth Month in a Row

The industry's profit margins are relatively low; over the past year it has had a 0.3 percent net margin on average, he said. Compared with 2006, there are 23 percent fewer businesses in the logging industry today, according to the North American Industry Classification system used by the Census Bureau.

With demand for new homes rising, Granado said there has been rising price pressure in its complicated supply chain, which includes raw materials, equipment, and labor.

"A lot of it has to do with the wood as a commodity itself and the inability to differentiate," Granado said.

Mannington Mills, Inc., a lumber manufacturer, is increasing prices for its engineered wood floors by up to 6 percent starting Monday, citing increases in log and transportation costs.

"This is an industry that has been in need of a price increase for a very long time. Excess capacity and competitive pressure Asia has made this difficult," said Dan Natkin, director of Mannington Mills' hardwood and laminate business. "We have reached a breaking point where we have to raise prices."

The last time the company had a line-wide increase across its entire hardwood products was about a decade ago, he said.

"Because the home industry has been so depressed, businesses in that sector have kept prices historically low," he said.

Natkin said he has seen lumber prices creep up, due to the laws of supply and demand. Wood, in general, is closely tied to raw material pricing, he said.

While the homebuilding and logging industry are "very closely related," he said, raw material is just one component of the construction industry.

Wages and fuel and trucking prices are also another component.

He said he does not know when his company will increase prices next, but if it does, the rise will be "modest."

Armstrong World Industries, which designs and manufactures floors and ceilings and is based in Lancaster, Pa., also said it is increasing prices. Starting Monday, the company is implementing a 6 percent price increase on all its engineered and solid wood flooring to offset the cost of lumber.

Jennifer Johnson, spokeswoman for Armstrong, said the impact its wood flooring increase could have on the overall price of a house is "negligible."

"The real meter to watch on the housing market continues to be consumer confidence," she said. "As that strengthens so should the housing market."