The double-peaked lumber bubble of 2021 and 2022 that once drove home construction costs through the roof and fueled inflation is now nothing more than a memory.
Domestic lumber prices have fallen 75% from their May 2021 record high of $1,514 per thousand board feet to just $366 this week, roughly matching pre-pandemic levels, according to the Composite Lumber Price Index Random Lengths. The decline in the price of lumber has been particularly dramatic in the past 90 days in the futures market alone, with July contract prices falling 28% to $466 per thousand board feet (futures prices are about $100 above prices of the moment due to the delivery fee).
Industry experts blame a record decline in US housing affordability and a slowdown in home renovations for reducing demand for lumber. It is too expensive for consumers to buy new homes or renovate their current homes. This has led to fewer construction projects and slower lumber sales. Meanwhile, overly optimistic forecasts for industry demand amid hopes for lower interest rates and rising home sales have led lumber mills to increase supply at the worst possible time.
Put it all together and “it’s an ugly scenario” for the timber market, said Ashley Boeckholt, director of timber and risk management at Sitka Forest Products USA. wealth. “We’re having a hangover after three great years.”
Demand side: A record deterioration in housing affordability and a slowdown in renewal
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, high home prices and high mortgage rates have led to a record decline in US housing affordability in recent years. The Atlanta Federal Reserve’s Home Ownership Affordability Monitor (HOAM) index is now at its lowest level since the start of the global financial crisis in 2008.
As a result, even with the ongoing housing shortage, demand for new homes has remained subdued, leading to a correspondingly weak demand for the lumber to build them. “Housing affordability is really out of whack right now,” said Dustin Jalbert, a senior economist who leads Fastmarkets’ wood products team. wealth. “It’s one of the least affordable times to buy a home in decades, and the pool of qualified buyers is starting to shrink somewhat as well. So the high interest rates eventually start to bite.”
Weak demand for new homes sent homebuilder confidence to a five-month low last month and housing starts fell 19% from a year ago. Most of this decline was the result of a 52% year-over-year drop in multifamily housing starts. For a time, steady single-family home starts kept lumber prices from falling significantly because single-family homes use more wood than multi-family projects. But now that trend has reversed, too, with single-family housing starting to fall 2% year-over-year in May.
Additionally, the critical home renovation market, which boomed during the pandemic by helping to prop up lumber prices, is also showing signs of weakness. For example, HomeDepot saw its U.S. comparable sales fall 3.2% in the first quarter. One of the reasons for the decline was “softer engagement on larger discretionary projects … such as kitchen and bath remodels,” noted Billy Bastek, the retailer’s executive vice president of merchandising, on the company’s earnings call. May.
Boeckholt, a veteran lumber dealer who also hosts the weekly “Lumber Word” podcast, said he’s seeing evidence of declining demand for lumber even from retail buyers. Dealers like him are starting to get “premium” lumber usually reserved for the Home Depots and Lowes of the world. “That generally means there’s a push” from retail shoppers to home goods centers, he noted.
This slowdown in home renovations, when combined with the U.S.’s long-term housing affordability challenges, has led to a serious lack of demand for wood products, especially when compared to what was forecast just a year ago.
The supply side: A hope-driven ‘cambique’ effect
While the demand side of the lumber market is sick, the supply side may be in an even worse position. After lumber prices rose in 2021 and 2022, the lumber industry responded by investing to increase production. Many lumber veterans saw a long-term opportunity for increased demand for their products due to the housing shortage; and like many Americans, they also anticipated immediate cuts in interest rates, which tend to stimulate more short-term demand for lumber.
The only problem with this plan, as Fastmarkets’ Jalbert explained, is that it takes years to build new sawmills and increase the supply of lumber. This means that much of the new lumber supply that was put into operation during the pandemic is just coming to market – at a time when increased supply is the last thing the industry needs.
“It’s a classic whip,” Jalbert noted. “The supply side [responds] similarly to demand, and by the time it comes to market, the demand landscape has already changed – and in this case in a negative way.”
Boeckholt supported Jalbet’s argument, saying it is an example of the “hangover” the lumber market is experiencing after its highly profitable pandemic years led to many “hopes” for more demand. That’s especially true “down in the U.S. South, where there have been mills in a pipeline to be built for three or four years that finally started over the last year,” he said, adding that there were also many investment in old mills to increase production in many regions around the country.
What to expect from lumber prices by the end of 2024
When it comes to what to expect for the rest of this year, Boeckholt warned that lumber prices could weaken near their current, pre-pandemic levels, with the potential for a small increase — roughly $50 — in the quarter. fourth. “There was a lot of hope there, so when we take away all that hope — which we will, eventually — then we’ll get to the bottom,” he said.
Jalbert also believes that lumber prices are likely to stagnate through the end of 2024, but in 2025, he argues that things could change. Some sawmills will be forced to slow or shut down production due to falling lumber prices in the second half of this year, reducing lumber supply – “the bull’s eye in the opposite direction.”
That, along with interest rate cuts that could boost demand for lumber, is likely to push lumber futures into a range between $500 and $600, or slightly above pre-pandemic levels, according to Jalbert. “Supply will be cut and demand will recover,” he said. “But that will take time.”