The price of lumber has drastically increased amidst the unexpected surge in demand for single-family housing, coupled with the short supply of construction materials. Softwood lumber prices soared 112% compared to the previous year and increased by 10% in the first week of February 2021. According to the U.S Census, about 90% of completed single-family homes incorporate wooden frameworks. As such, housing costs and associated insurance premiums are bound to go up if the price for this important construction material continues to increase.
Housing Demand Was Relatively Lower in 2019
As of 2020, the real estate market has experienced an increasing demand for single-family housing. Many stakeholders in the construction industry though, including lumber dealers and manufacturers, didn’t see it coming. This factor partly explains why lumber is currently in such short supply.
In 2019, the demand for new homes and remodeling was much weaker than it was both this year and last. Mill operators and lumber dealers didn’t expect to see substantial improvements in the housing demand in 2020, especially taking into account the potential impact of COVID-19 on the construction and housing industries. Their natural response was to curtail production and inventories while waiting for the market to recover. Due to the pandemic, most millers couldn’t operate at full capacity even if they wanted to. They had to reduce shift work in compliance with social distancing rules. Lumber dealers followed suit by not replenishing their inventory.
Housing Demand in 2020 and 2021
Contrary to expectation, the COVID-19 pandemic is partly responsible for the housing boom experienced in 2020. The trend continues into 2021, and according to the U.S. Census, demand for new single-family units has soared up to 30% in the last 12 months. Analysts attribute this trend to several factors, including the sharp demand for home remodeling.
With hundreds of millions of people staying at home or working remotely due to pandemic-related concerns and restrictions, many households are even getting their homes remodeled to create additional outdoor living spaces.
Keep in mind that spending more free time at home allowed people to save money and invest in their homes. Many are renovating their residential properties and putting up or modifying patios, decks and other exterior structures.
Mill operators didn’t properly prepare for the new housing demand in January 2021 and remained unable to supply enough lumber to the industry. As such, lumber prices were bound to skyrocket with the demand exceeding production.
Effect of Rising Lumber Prices on Home Insurance Premiums
Home insurance providers generally consider the anticipated cost of claims losses before increasing or decreasing premium rates. When construction costs go up, it becomes more expensive to replace or rebuild properties destroyed in covered events. Since insurers will be spending more on compensating claims for damaged homes, they have to factor these additional costs into future premium rates.
Multiple catastrophic events and other factors influencing construction costs caught the attention of major insurance carriers last year. Besides the higher housing demand, the shortage of construction materials due to weather-related disasters impacted home replacement/repair costs in 2020, forcing providers to review homeowners insurance premiums upward.
That year, a total of 63 natural disasters were responsible for home insurance claims. These loss events included tornadoes that destroyed properties in the Midwest. Wildfires ravaged homes in the West, while the Southeast experienced devastating hurricanes.As these covered perils occurred, lumber was already in short supply. Mills had decreased production of the building material due to COVID-19-triggered labor constraints. Lumber production also couldn’t match its demand, forcing insurers to increase construction cost estimates significantly.
Materials and labor costs jumped 9.2% year-over-year in October 2020. A roughly 60% rise in lumber prices contributed to the overall spike in home prices. With the increase in construction costs driving up home replacement cost estimates, insurers had to adjust insurance to value (ITV) accordingly. ITV is a statistical comparison between your home’s coverage amount and how much your insurance company may have to pay to replace or repair your property after damage in a covered hazard.
At CAV Insurance in Wellesley, MA, we keep up to date with construction trends and costs. We have access to a wide variety of homeowners insurance markets to make sure your home has sufficient coverage at a competitive price. Contact us on 781-237-4107 to get started.