The double-peaked timber bubble of 2021 and 2022, which once drove up home constructing costs and exacerbated inflation, is now nothing greater than a memory.
According to Random Lengths’ Framing Lumber Composite Price Index, spot lumber prices have fallen 75% from their May 2021 record high of $1,514 per thousand board feet to simply $366 this week, roughly in step with pre-pandemic levels. The lumber price decline has been particularly dramatic prior to now 90 days within the futures market alone, with July contract prices falling 28% to $466 per thousand board feet (futures prices are about $100 higher than spot prices attributable to a delivery fee).
Industry experts blame the falling demand for lumber on a record drop in housing affordability within the U.S. and a slowdown in home renovations. It’s just too expensive for consumers to purchase recent homes or renovate their existing ones. This has led to fewer construction projects and falling lumber sales. At the identical time, overly optimistic industry forecasts of demand in hopes of falling rates of interest and rising home sales have led lumber mills to extend their supply on the worst possible moment.
All in all, “it’s an ugly scenario” for the timber market, said Ashley Boeckholt, director of timber and risk management at Sitka Forest Products USA, Assets“We have something like the hangover from three great years.”
The demand side: A record deterioration in housing affordability and a slowdown in renovations
The aspects behind lumber price movements are varied and complicated, but as at all times, all of it comes right down to supply and demand. On the demand side, sky-high home prices and increased mortgage rates have led to a record decline in home affordability within the U.S. lately. The Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor (HOAM) Index is now at its lowest level since before the worldwide financial crisis of 2008.
As a result, demand for brand new homes has remained subdued despite ongoing housing shortages, resulting in similarly weak demand for lumber. “Housing affordability is simply an outlier right now,” Dustin Jalbert, a senior economist who leads Fastmarkets’ wood products team, told Assets“It’s one of the worst times to buy a home in decades, and the pool of qualified buyers is starting to shrink a bit, so the high interest rates are going to start to make themselves felt at some point.”
Due to weak demand for brand new homes, builder confidence fell to a five-month low last month and housing starts fell 19% from a yr ago, with most of that decline coming from the 52% year-over-year drop. fall in housing starts for multi-family homes. For some time, regular housing starts for single-family homes prevented a big decline in lumber prices, as more lumber is used for single-family homes than for multi-family homes. But now this trend has also been reversed, and housing starts for single-family homes fell by 2% in May in comparison with the previous yr.
In addition, the essential home renovation market, which boomed through the pandemic and helped boost lumber prices, can be showing signs of weakness. HomeDepot’s comparable sales within the U.S. fell 3.2 percent in the primary quarter. One of the explanations for the decline was “lower commitment to larger discretionary projects … such as kitchen and bathroom renovations,” said Billy Bastek, the retailer’s executive vice chairman of merchandising, on the May earnings call.
Boeckholt, an experienced timber merchant who also publishes the weekly “Woodword” podcast, said he can be seeing signs of declining demand for lumber from retail buyers. Dealers like him are beginning to get “premium” lumber that is often reserved for the Home Depots and Lowes of the world. “That generally means there is resistance” from retail buyers at home goods centers, he noted.
This decline in home renovation, combined with long-standing housing affordability issues within the United States, has led to a severe decline in demand for wood products, especially in comparison with projections made only a yr ago.
The supply side: A hope-driven “whip effect”
While the demand side of the lumber market is weakening, the provision side could also be in a good worse situation. After lumber prices soared in 2021 and 2022, the lumber industry responded by investing to extend production. Many lumber veterans saw a long-term opportunity for increased demand for his or her products attributable to the housing shortage; and like many Americans, in addition they anticipated upcoming rate of interest cuts, which can are likely to boost short-term demand for lumber.
The only problem with that plan, says Fastmarkets’ Jalbert, is that it takes years to construct recent sawmills and increase lumber supply, meaning much of the brand new lumber supply that was commissioned through the pandemic is barely now coming to market – at a time when additional supply is the last item the industry needs.
“This is a classic whip,” noted Jalbert. “The supply side [responds] in a similar way to demand, and by the time it comes to market, the demand picture has already changed – and in this case in a negative way.”
Boeckholt supported Jalbet’s argument, saying it was an example of the “hangover” the lumber market is experiencing after the highly profitable pandemic years led to much “hope” for more demand. That’s very true “in the southern U.S., where sawmill construction has been planned for three or four years and finally started last year,” he said, adding that many regions of the country have also invested heavily in older sawmills to extend production.
What can we expect from wood prices by the top of 2024?
As for the remainder of the yr, Boeckholt warned that lumber prices could remain near their current pre-pandemic levels, with a modest price increase of about $50 possible within the fourth quarter. “There was a lot of hope out there, and if we crush all that hope – which we will at some point – then we’re going to hit rock bottom,” he said.
Jalbert also believes that lumber prices are more likely to remain stagnant through the top of 2024, but in 2025, he argues, the situation could change. Some sawmills will likely be forced to cut back or shut down production attributable to low lumber prices within the second half of the yr, which would scale back lumber supply – “the whip in the opposite direction.”
That, coupled with rate of interest cuts that might boost demand for lumber, will likely push lumber futures prices into the $500-$600 range, or barely above pre-pandemic levels, based on Jalbert. “Supply will go down and demand will recover,” he said. “But that will take time.”
