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New home construction booming, despite skyrocketing lumber prices
by Tom Robertson, Minnesota Public Radio
May 10, 2004

Bemidji construction company owner Doug Ferrier says the cost of lumber materials has risen dramatically in just the past year. The pricetag for his current remodeling project will be about $2,000 higher than the cost estimate he made last summer. (MPR photo/Tom Robertson)

Low interest rates have prompted a boom in new home construction in Minnesota. Last year, there were a record 40,000 new houses built in the state. That's a 30 percent increase from the year before. But the pricetag on those homes is skyrocketing. The price of lumber materials has more than doubled in just the past year. And home builders say what's worse, local governments have jacked up the permit fees they charge for new construction.

Bemidji, Minn. — Doug Ferrier and his crew of carpenters are busy remodeling a home on Lake Bemidji. Ferrier owns a small construction company. He says low interest rates mean steady work for his employees. But Ferrier says rising lumber prices are causing sticker shock for some of his customers. It's the highest he's ever seen them.

Back in 1990, a four-by-eight sheet of plywood-type material called oriented strand board cost about $5. Now, it costs $22. That's an all-time high, nearly three times what it cost just a year ago.

Ferrier says the cost of his current remodeling project is several thousand dollars more than what he estimated last year. He was forced to pass the increase on to the homeowner.

"It's always hard to ask for more money when you've gone over your price," Farrier said. "It's always hard to give bad news. Either your going to lose on the job, or your going to have to try to get more money."

Lumber prices are high across the U.S. Experts say it's because the wood products industry can't keep up with the needs of the housing market. Jon Anderson is an industry analyst in Eugene, Oregon, and publisher of a weekly market report called "Random Lengths."

We've seen fees increase anywhere from 50 to 500 percent. And so that seems to be more problematic for our Minnesota long term housing industry rather than the volatility of these material prices. - Pam Perri-Weaver

"The root cause is just incredibly high demand, mostly coming from the new housing sector," said Anderson. "This has stressed the ability of the industry to supply that demand. And the result is upward pressure on prices. And in some cases, it's fairly dramatic upward pressure."

A few years ago lumber producers were hurting and overproduction was widespread. Minnesota companies like Potlatch were losing money. Potlatch produces oriented strand board. Jim Bowyer, professor in the department of bio-based products at the University of Minnesota, says the high lumber prices may be bad news for consumers. But it's revitalizing the wood products industry.

"We've had quite a number of lumber mills and plywood mills go out of business across the United States," said Bowyer. "Oriented strand board mills five years ago were right on the brink. I mean they were hardly making any money. And now they're able to achieve a level of profitability."

Minnesota home builders aren't surprised by the rising price of lumber. Pam Perri-Weaver, executive vice president of the Builders Association of Minnesota, says contractors are used to the volatility of the lumber market.

Perri-Weaver says they're more concerned about a dramatic increase in building permit and other fees required by local governments. She says when the state Legislature cut aid to local governments last year, cities and counties saw increased fees on the construction industry as a way to increase revenue.

"We've seen fees increase anywhere from 50 to 500 percent," said Perri-Weaver. "And so that seems to be more problematic for our Minnesota long term housing industry rather than the volatility of these material prices. Because when material prices go up, they also go down. But with fees, they just go up. They keep going up."

Perri-Weaver says the rising cost of new home construction is putting new home ownership out of range for some first time buyers. But it isn't slowing down Minnesota's strong housing market. Builders are expected to construct nearly 40,000 homes this year, just slightly fewer than in 2003.

The one thing that would put a damper on new home construction is if interest rates go back up. Industry experts say that's likely to happen by the end of this summer.

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