The price of lumber surged during the pandemic. Suppliers miscalculated the effect of the pandemic on demand for their products. Rather than falling off, demand surged as people stuck at home took to home improvement projects.
The boost in demand coupled with reductions in supply sent prices of lumber up to $1,690 per 1,000 board feet in May of this year from a low of $240 at the end of March 2020. Since hitting that high in May, prices have come crashing back down and sit at $581 per 1,000 board feet as of this writing.
Lumber is vital for many of the projects that people go to Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) for. Therefore, drastic price changes could cause consumers to change their buying decisions.
Lumber inflation is fueling revenue increases
Interestingly, as the price of lumber was rising, Home Depot and Lowe’s were raising prices they charge customers, and so far, those higher prices have not decreased demand. Perhaps it’s because people feel wealthier after several rounds of stimulus checks have hit their bank accounts since the pandemic. Or it could be that people are spending a lot more time at home lately and see a higher return on investment on their home improvement projects.
Regardless, both Home Depot and Lowe’s have said that rising commodity prices have helped juice their sales as they have passed along the price increases to their customers. Home Depot said, “Inflation from core commodity categories positively impacted our average ticket growth by approximately 375 basis points during the first quarter.”
Similarly, Lowe’s said, “Strong sales growth was driven by several factors, including a continued consumer focus on the home, a favorable weather backdrop across the country, commodity inflation, especially within the lumber category, consumer support from the March government stimulus package … ”
Given that both companies are experiencing rapid sales growth since the pandemic onset, it’s hard to say their sales could have been better if lumber prices remained lower. You may already be aware that lower prices tend to increase unit sales. However, when you are already selling nearly every unit you have on the shelf, lower prices cannot increase unit sales.
That may not be the case for home improvement retailers any longer.
The U.S. vaccination campaign got off to a fast start and, even though it has slowed down recently, over 342 million doses have been administered. As a result, states have eased business restrictions, and people have more options for what they can do with their time and money. Further, it’s been several months since the last stimulus check was sent, so consumers will have less money at their disposal.
The decrease in lumber prices comes at an opportune time when the consumer is likely to become more price-conscious. And with more options for where they can spend their money, inventories are not likely to be as constrained as they were during the pandemic. The result could be that lower prices cause people to take on projects they previously put on hold because they were too expensive to complete.
It can help the home improvement retailers to have a soft slowdown from the turbocharged growth rates during the pandemic. And in the longer run, sustained low levels of lumber prices could increase home building and subsequently homeownership, which would be great news for Home Depot and Lowe’s.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.