Explaining Post-Pandemic Lumber Price Volatility and its Welfare Effects

Abstract

Abstract The COVID-19 pandemic led to an unprecedented increase in the U.S. price of softwood lumber by more than 300%. The price increase has been attributed to constraints on supply and increased demand for lumber caused by a pandemic-induced boom in domestic housing construction and, more so, home improvements. However, the volatility in lumber prices after the COVID-19 outbreak remains unexplained. In this paper, we employ a theoretical model to explain the cause of price volatility. We examine why demand and supply functions for lumber might be quite inelastic over the period from March 2020 to April 2022, despite very small shifts in demand. This implies that slight movements in interest rates or changes in the prices of substitutes, for example, can lead to large jumps in prices. Price volatility harms consumers while greatly benefitting lumber producers. Overall, as a result of the pandemic, U.S. producers gained some $5.3 billion, while U.S. consumers lost $7.3 billion per quarter.