Lumber futures are struggling to reclaim a crucial support level as the housing market gets more restrictive for first-time homebuyers because of surging mortgage rates.
Lumber prices per thousand board feet fell 1.5 percent recently, remaining subdued below their crucial $1,000 per thousand board feet level, which has served as support multiple times since it crossed above that threshold in December. The essential building material is down 30 percent from its March high of $1,357 per thousand board feet.
The ongoing weakness comes as mortgage rates rise following the Federal Reserve’s rate hike last month. The popular 30-year fixed mortgage rate surged above 5% for the first time in years. The rate hit 5.02 percent, which is the highest since 2018.
Higher mortgage rates will only add barriers to an already restrictive housing market, where home prices have been pushed to dizzying heights by cheap debt. For homebuyers, especially those looking to break in for the first time, higher mortgage payments and supply-demand imbalances are creating an affordability crisis.
Eventually, this could lead to a drop in demand for housing, which in turn would lead to a slowdown in new construction next year, contributing to a continued decline in lumber prices, according to ING Economics.
Excess housing supply would be a welcome sign to new homebuyers. Extra supply would help slow the pace of growth in rent prices, and thus help tame inflation and give the Fed breathing room to slow its current rate-hiking cycle.
It appears the jump in interest rates already is impacting home sales. February home sales fell 6 percent year-over-year to a seasonally adjusted annual rate of 772,000, according to data from the U.S. Commerce Department.
A further rise in mortgage rates could help balance the supply and demand of new homes, which in turn could put continued weakness on lumber prices.