Our Perspective on “Runaway Lumber Prices”

e2Value

Yes, lumber has gone up considerably over the past year, some 200+%. However, it’s also gone down in price. Nobody—well maybe a few folks—wanted money back!

Take a look at the lumber, oil and copper prices for the last 1, 5 and 10 years. The graphs in these links show how prices are moving and their history:

That is just the start. There are other commodities that you could look at also.

In one year, even five, things look volatile. Look over 10 years. Oil prices have dropped considerably. (Ask anyone in an oil producing region.)

At e2Value we consistently review prices, attend presentations and devour economic reports and data. The consensus among experts is that we may be nearing the high point and expect the numbers to moderate later this year into 2022. If you are able to mill lumber right now, then you will want in on the action—prices are extremely high. As more mills come online and increase capacity to take advantage of these higher prices, the added supply will inevitably cause prices to go down. This is similar to how oil and other commodities fluctuate.

This has been a unique time for lumber, however. Call it a perfect storm, as the expression goes, between initial COVID-19 shutdowns, labor shortages, increased renovation and building demand, and tariffs. But it is expected to peak soon.

All structures, whether a home, commercial or farm structure, are a combination of materials and labor hours. If a structure has a total loss today, it will be at least 6 to 18 months, if not longer, before rebuilding begins due to the current projects in the pipeline.

We anticipate a 7% – 8% inflation factor for 2021–2022. There is no question that partial losses will be impacted by the current higher lumber costs, but with the time lag, and less sensitivity to time constraints, total losses run on a different price sensitivity scale than partial losses.

We conclude the best plan of action is to revisit the Insurance to Value of a structure. We offer a number of ways to inspect, reinspect and recalculate your book without ever having to physically visit a property.

This could be especially important for higher value homes, which tend to follow a higher inflation rate every year, let alone the past year.

Look at the inflation numbers that have been used since the great recession of 2009. If you have been using inflation guards of between 2% and 3% and looked at homes four or more years ago, these homes could be acutely undervalued. If you were using 3-5%, then your book could be in better shape.

Structures whose valuation is over four years old that have been updated each year with lower factors, will be more on the undervalued side versus structures valued in the last three years and updated with higher inflation factors.

Even a 15% roll-on won’t help a 40% undervalued structure. If a structure was valued at 100%, then had an 8% roll-on in a 20% inflationary period, it is likely only low by 10%. Whereas structures valued just four years ago at even 80%, that were then updated with 3% roll-ons, might have an even wider gap to value. The latest inflation rates will cause the error rate to go up exponentially as more time goes by.

The solution? Inspect, reinspect, and recalculate your book. We can help you choose a cost-effective path to do so. Contact us.