The twin peaks of the lumber bubble in 2021 and 2022, which once sent homebuilding costs soaring and fueled inflation, are now a memory.
Spot lumber prices have plummeted 75% from an all-time high of $1,514 per thousand board feet in May 2021 to just $366 this week, roughly in line with pre-pandemic levels, according to Random Lengths’ Framing Lumber Composite Price Index. Lumber prices have fallen particularly sharply in the futures market over the past 90 days, with the July contract down 28% to $466 per thousand board feet (futures prices are about $100 higher than spot prices due to delivery fees).
Industry experts blame lumber demand on record declines in U.S. housing affordability and a slowdown in home renovations. For consumers, the cost of buying a new home or renovating an existing one is too high. This has led to fewer construction projects and slower lumber sales. Meanwhile, industry demand forecasts have been overly optimistic on hopes of falling interest rates and rising home sales, leading lumber mills to ramp up supply at the worst possible time.
All in all, “it’s an ugly scene” for the timber market, said Ashley Boeckholt, director of timber and risk management at Sitka Forest Products USA. wealth. “We had a good three years of hangover.”
Demand side: Record deterioration in housing affordability and decorating slowdown
The factors behind lumber price movements are varied and complex, but as always, it all comes down to supply and demand. On the demand side, sky-high home prices and rising mortgage rates have led to record declines in U.S. housing affordability over the past few years. The Atlanta Fed’s Housing Affordability Monitor (HOAM) index is currently at its lowest level since before the 2008 global financial crisis.
So even as the housing shortage continues, demand for new homes remains subdued, resulting in equally weak demand for lumber to build new homes. “Housing affordability is really off the mark right now,” said Dustin Jalbert, senior economist on Fastmarkets’ millwork team. wealth. “This is one of the cheapest times in decades to buy a home, and the number of qualified buyers is starting to shrink a bit. So, high interest rates do eventually start to have an impact.
Weak demand for new homes caused homebuilder confidence to fall to a five-month low last month, with housing starts down 19% from a year earlier. The decline was primarily due to a 52% annual decline in multifamily housing starts. For a time, steady single-family housing starts kept lumber prices from falling significantly because single-family homes use more lumber than multifamily housing. But now that trend has reversed, too, with single-family housing starts falling 2% annually in May.
What’s more, the key home improvement market, which has boomed during the pandemic and helped lift lumber prices, is also showing signs of weakness. For example, HomeDepot’s U.S. comparable sales fell 3.2% in the first quarter. Billy Bastek, the retailer’s executive vice president of merchandising, noted on the May earnings call that one reason for the decline was “lower participation in larger discretionary items… …such as kitchen and bathroom remodels.”
Bockholt, an experienced lumber trader and host of the weekly Timber World podcast, said he is also seeing evidence of lower lumber demand from retail buyers. Traders like him began taking in the “premium” lumber usually reserved for Home Depots and Lowes around the world. “This usually means resistance from retail buyers in home furnishing centers,” he noted.
A slowdown in home renovations, coupled with the nation’s long-standing housing affordability challenges, has resulted in a significant lack of demand for wood products, especially compared to forecasts a year ago.
Supply side: the “bullwhip” effect driven by hope
While the demand side of the lumber market is sluggish, the situation on the supply side could be even worse. After lumber prices surge in 2021 and 2022, the lumber industry’s response is to invest in increasing production. Many lumber veterans see long-term opportunities for increased demand for their products due to housing shortages; like many Americans, they also anticipate upcoming interest rate cuts, which tend to drive near-term lumber demand growth.
As Fastmarkets’ Jalbert explains, the only problem with the plan is that it will take several years to create new sawmills and increase the supply of wood. This means that much of the new timber supply that came online during the pandemic is just now entering the market, at a time when the increased supply is the last thing the industry needs.
“It’s a classic bullwhip,” Jabot pointed out. “Supply side [responds] In a similar way to demand, when entering the market, the demand situation has changed – in this case, a negative change.
Bockholt backed Jalbert’s sentiments, calling it an example of the “hangover” the timber market is experiencing after a highly profitable year due to the pandemic led to “hopes” for more demand. “This is especially true in the southern United States, where plants have been in the works for three or four years and finally came online last year,” he said, adding that there are also significant investments in older plants in many parts of the country that will increase production.
What to expect for lumber prices by the end of 2024
When it comes to expectations for the rest of the year, Boeckholt warned that lumber prices are likely to hover around current pre-pandemic levels, with prices likely to rise slightly (around $50) in the fourth quarter. “There was a lot of hope, so when we finally take away all hope – which we eventually will – that’s when we hit rock bottom,” he said.
Jalbert also believes that lumber prices may stagnate by the end of 2024, but that the situation may reverse by 2025. Due to low lumber prices in the second half of the year, some sawmills will be forced to slow down or close production, thereby reducing lumber supply – a “bullwhip in the opposite direction.”
Jalbert said that, coupled with interest rate cuts that could boost lumber demand, could cause lumber futures prices to rise to between $500 and $600, or slightly above pre-pandemic levels. “Supply will decrease and demand will recover,” he said. “But it takes time.”
