In the wake of COVID-19, lumber prices have skyrocketed.

"The pandemic played a role in ever-increasing building materials pricing escalation, " explains David Coil, a master logger and a principal and business risk advisor at the Hummel Group in Ohio. "It's up nearly 180% over the past 10 months."

If you're considering building or renovating a home, it's important to understand why lumber prices are so high and how these additional costs can impact your insurance.

Why Are Lumber Prices So High?

The pandemic contributed to a perfect storm of sorts which drove the increase in current lumber prices. According to Coil, there are key factors to the escalation in materials pricing.

"On the production side, pandemic-related shutdowns in 2020 severely hampered supply." As with much of the country, many mills and timber operations across the U.S. and Canada were shut down in early to mid-2020, leading to a backlog.

"Many homeowners also decided to upgrade to new homes which have caused a startlingly low inventory of available houses on the market," Coil says. "Skyrocketing existing home prices and increased demand for materials also contributed."

Then, the increase in work from home played a part in the imbalance in supply versus demand. "Stay-at-home orders forced families to reevaluate their private residences," Coil says. With local and city amenities out of the picture due to closures, people looked to what they could add to their homes, including pools, decks, patios and office space. That "remodeling surge," as Coil calls it, also helped drive home lumber prices up.

Finally, tariff issues with Canada from previous years also had a role. "The U.S. had imposed 20% lumber import tariffs from Canada, its largest importer of building materials, says Coil. "Although those have now been cut to 9% by the current administration, the [hope is that this will lead to an] overall lumber price reduction in the short term is waning."

These high prices might be here to stay for a while, even post-pandemic. "Short-term lumber pricing is anticipated to remain at or near record highs due to the supply and demand imbalance," Coil explains. "Lumber supply may be even more limited heading into the 2021-22 construction season as mills chose to slow down production in the winter of 2020-21."

Lumber's Impact on New Home Builds and Renovations

While many people tend to remodel before selling their home, this past year has seen a buck in the trend. Spending on re-modeling is up, but many people stay put in their homes once projects finish, contributing to a shortage in the housing market.

A recent study on home improvement from Harvard University saw that while spending was up a modest 3% in 2020, it far exceeded the amount expected when the pandemic began. After a slow start, retail sales of building materials grew double digits each month from April 2020 through the end of the year, with nearly 80% of survey respondents saying they had started a project in their home, including decking, fencing and home office work.

The study also found that bringing in outside contractors grew. During the early parts of the pandemic, those were mostly limited to roofing, siding and window projects. However, as time went on, new flooring, remodels and kitchen renovations increased in popularity. The unexpected surge in demand for these projects also contributed to higher lumber costs on the market, according to Coil.

New home construction has also been impacted by increases in material cost to build a house and overall market demand. Throughout 2020, new home construction rose, which added to an already dwindling lumber supply. Reports from the Census Bureau show privately owned housing construction up 37% from March 2020 to March 2021.

Unsurprisingly, the lack of lumber supply coupled with increasing demand has contributed to the costs of new home builds. The National Association of Home Builders estimates that the average cost of home construction has increased home prices by $24,000 due to higher lumber costs.

How Lumber Prices Can Impact Your Insurance

If you're currently (or considering) remodeling or building a new home, keep an eye on the lumber market. Knowing how much lumber costs to build a house and how it impacts a remodel can help you understand how much coverage you need for protection from loss and damages.

"As most insurance policies insure for 'full replacement cost,'" Coil says, "homeowners can be affected in two ways if they do not increase their coverage limits."

• If there's a total loss, you could find yourself upwards of 20-40% short of replacement coverage dollars.
• Some policies have "co-insurance penalties," which means you, as the homeowner, must keep the insured building value within a certain percentage of total replacement value. That can be as much as 90%.

As you prepare your new building or home improvement project, ensure you're taking increased costs into account. What might have been enough coverage for replacement in 2019 could only take care of a fraction of the costs in 2021 (and beyond).

Speak with your local independent Westfield agent. They can discuss increasing building and dwelling coverages and help you find the best solution to cover current lumber costs.