Lumber Prices Are Toppling, But Will Home Prices Come Down With Them?

By CHUCK GREEN

With lumber prices toppling, it might be the ideal time to knock on wood.

Gently, though. It just might be a bit fragile at the moment.

Year to date, prices have sagged around 50%, according to 7seasgroupusa.com. They recently sunk to their lowest point in nine months as they traded under the $600-per-thousand-board-feet mark. Conversely, a year ago, prices, fueled by pent-up demand for construction and home upgrades in the aftermath of COVID on the heels of a frenzy of speculation, reached $1,733, which was unprecedented.

But as the housing market backed down in light of escalating interest rates, lumber prices have borne the brunt, receding more than 60% from their March highs, according to Business Insider.

In May, the price of lumber sagged to as low as $780 per thousand board feet, according to the Chicago Mercantile Exchange.

How times have changed. Lumber was trading for a high of $1,357 per thousand board feet just three months ago. Around this time a year ago, it hit its apex at $1,733, according to Statista, reported marketwatch.com.

And with the Fed almost certain to continue to raise interest rates, it’s unlikely lumber conditions will improve soon.

Industry insiders say they’ve never seen this level of enduring price volatility in lumber prices.

“It’s been an incredibly volatile last two years for lumber,” Darin Newsom, a commodity analyst and president of Darin Newsom Analysis Inc., told The Mortgage Note.

“We’ve seen a large-scale ebb and flow in demand, with an ebb now in place. Construction costs have gone up across the board, including lumber, copper, and labor, just to name a few,” said Newsom.

Meanwhile, inflation’s “chewing away disposable income, meaning less is being spent on home projects that became all the rage during the lockdown, and even home building.”

A report from Random Lengths showed that lumber buyers hit the brakes on ordering. Now sawmills are beginning to wield the knives, cutting their prices in light of growing inventory.

“Triple-digit discounts became the rule rather than the exception,” Random Lengths said.

However, the decline in lumber prices hasn’t hit housing prices. At least, not yet. The median sales price of new houses sold in May 2022 was $449,000. The average sales price in the same month was $511,400.

Given the current environment, 80% of homebuyers indicated purchasing a home isn’t a good idea for now, according to a National Housing Survey conducted by the Federal National Mortgage Association, stated fanniemae.com.

With the central bank fanning mortgage rates, homes have moved beyond the financial reach of some, putting a crimp in the demand for building materials like lumber, the site stated.

What’s more, with interest rates expected to continue to rise through the rest of the year, the trend toward a slowdown in housing starts should continue, said Newsom. This should decrease overall demand for lumber, pushing the futures market lower as well. “Could we see the price approach the April 2020 low? It’s possible.”

Tim Morris, associate broker with HomeSmart, said while prices were starting to backtrack, it’s going to be a while before end users make financial hay, reported azbigmedia.com.

“It’s like gasoline at the pump,” Morris explains. “People hear about a pipeline breaking and gas at the pump goes up 50 cents per gallon. Then we find out it really didn’t break, but it takes two months for it to finally get back down to where it was.”

And Rajan Parajuli, assistant professor and extension specialist, Forest Economics Forestry & Environmental Resources at North Carolina State University, told The Mortgage Note that lower prices might help the consumers, “but the economy slows down and housing markets are cooling off which will eventually create supply-demand imbalances.”

Added Newsom: “The economy seems to be in a state of flux at this time. While consumer demand for everything remains strong, inflation on everyday goods and higher interest rates could curtail big spending projects. This tells me the building industry could have difficulty, a situation exacerbated by high labor costs.

“It will be interesting to see when consumers hit a tipping point with inflation; not just in new housing but in overall spending as supplies remain tight on nearly everything such as all petroleum products.” This could lead to continued problems for other industries, including retail and construction, he continued.

Meantime, lumber prices are forecasted to find their sweet spot in the range of $450 to $600 over the next six months, reported 1build.com.

Pent-up demand for the construction of housing should mean prices will avoid plummeting, or crashing, the lumber market.

What’s more, with the easing of complications in the supply chain; meaning trucking, rail, and freight shipments are abetting the delivery of lumber to the areas of highest demand.

The downturn apparently short-circuited what had been since the pandemic a “spectacular run” for the price of lumber, according to investinghaven.com. Last year, the cost of lumber doubled between January and May. Several factors fueled the increase including high demand for building materials, the popularity of home improvements during the lockdown, and snags in the supply chain.

Seemingly further exacerbating matters, the pullback on prices is likely to continue.

Parajuli believes prices should range around $500 per thousand board feet, “and it’s definitely abnormal when we have lumber prices around $1500 per thousand board feet. When everything settles down, the prices should stay lower at their normal level.”

Risk analyst Brian Leonard, who specializes in the wood products sector at RCM Alternatives, told The Mortgage Note he expects to see lumber bounce higher a few times this year, “but when it comes down to it, $800 or higher lumber is not a value; $500 is.”

Lumber, like commodities such as corn or wheat, is purchased and sold with futures contracts, according to azbigmedia.com.

“The lumber that’s going to be produced next March is already sold to somebody on a futures contract. Some investor is buying it in hopes that they’re going to get an uptick,” Morris noted.

For his part, Tim Atkinson, Vice President of Marketing at Stimson Lumber, said it’s not easy to predict where lumber prices will be next year and by 2025, according to wagnermeters.com.

“That’d be a tough one; (many) factors weigh in on it,” such as supply chain disruptions, Canadian stumpage prices, higher Canadian duties and lack of imports due to clogged ports.

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Email story ideas to Editor Kimberley Haas: [email protected]