Lumber prices have been trending down since March as demand has declined. In early August prices dipped to a new record low for the year. Prices are down nearly 70 percent from the May 2021 pandemic peak and have fallen 56 percent year-to-date.
Prices of new homes are starting to show signs of cooling off amid concerns over a broader economic recession. New home sales for June fell to their lowest level since April 2020.
Some experts think the declines will continue, citing the Federal Reserve’s ongoing hikes in interest rates. The central bank is trying to address inflation, which sits at more than a 40-year high, by making borrowing much more expensive. The housing market — and by extension the lumber market — is especially sensitive to these increases, leaving them vulnerable.
“Conventional wisdom holds that the housing market, given its interest rate sensitivity, will be the first to go as the Fed tightens,” said Tracy Chen, portfolio manager at Brandywine Global.
The latest lumber declines are good news for homebuyers who previously struggled to find affordable options due to rising home prices and limited supply of homes for sale. The fact that mortgage rates have also come down nearly 50 basis points from their June peak is also a positive factor for buyers.
Another culprit in easing demand for lumber is the ongoing shift in consumer spending from goods to services as pandemic restrictions fade and Americans get back to eating out and traveling, noted Dustin Jalbert, a senior economist at the market research firm Fastmarkets RISI.
Fastmarkets RISI predicts U.S. softwood lumber consumption will drop 1.4 percent year over year in 2022. Jalbert noted in a July research report that this is still a “modest” drop by historical standards, and that it’s too soon to call a recession in the lumber market.
Some experts say we’ve reached the end of the volatile pandemic era price swings for lumber.
Kyle Little, chief operating officer at building materials wholesaler Sherwood Lumber, described lumber’s volatile swings over the past two years as a “cyclical bull wave” brought about by “extraordinary supply-chain and demand phenomena.” The industry experienced a ‘perfect storm’ of supply-chain complications because of COVID, issues with finding adequate labor, beetle infestations and fires in British Columbia, and more during the pandemic. At the same time, when the pandemic hit, it set off a boom in home demand and demand for lumber and building materials for home-improvement projects.
Now, though, Little says a new cycle is taking hold. “We’re in this process of consolidating in this new cycle in what I call the ‘Great Reset,’” he said.
He believes lumber prices will be lower than the previous three or four years moving forward, but they won’t return to 20-year historical norms of $200 to $400 per thousand board feet.
“I don’t think it’s doom and gloom for the lumber or building products business because the demand for shelter, generally speaking, is very high for the next five years or so,” said Little. “Millennials are still in the beginning stages of their family formation. And you just can’t ignore the demographics.”
Jalbert of Fastmarkets RISI believes that prices will likely find a bottom soon. “I think things are going to start stabilizing a bit here,” he said, adding that he believes new home sales and home purchase applications will begin to recover with the recent dip in mortgage rates, helping to boost lumber demand.
“The other thing that’s happening on the supply side is that the high-cost mills in Canada, specifically in British Columbia, are curtailing production to try to balance with the declining demand,” Jalbert said. If mills curtail production dramatically, it will likely help to set a floor on lumber prices, he added.
Ashley Boeckholt, cofounder of MaterialsXchange, a digital marketplace for buying and selling lumber, agreed with Little and Jalbert when it comes to future lumber prices – with or without mill shutdowns.
“I think the reality is the crazy volatility of the last two years is subsiding in lumber, and we’re going into a more normalized market,” he said. “From what I see today, I don’t think we’re going to see a crash. I think prices are going to moderate.”