The two-peaked wooden bubble of 2021 and 2022 which once promoted house building Cost through the roof and tightened Inflation today is nothing more 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 just $366 this week, roughly in line with pre-pandemic levels. The lumber price decline 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 higher than spot prices due to a delivery fee).
Industry experts set the record for fall Housing affordability in the U.S. and a decline in home renovations have dampened demand for lumber. It is simply too expensive for consumers to buy new homes or renovate their current ones. This has led to fewer construction projects and a decline in lumber sales. At the same time, overly optimistic forecasts of industry demand in hopes of falling interest rates and rising home sales have led sawmills to increase their supply at 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 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 increased mortgage rates have led to a record decline in home affordability in the U.S. in recent years. The Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor (HOAM) Index is now at its lowest level since before the global financial crisis of 2008.
As a result, even with ongoing housing construction ShortageDemand for new homes remains muted, leading to similarly weak demand for lumber. “Housing affordability is just a big issue right now,” Dustin Jalbert, a senior economist who leads Fastmarkets’ lumber 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 new homes, builder confidence fell to a five-month low last month and housing starts fell 19% from a year ago, with most of that decline coming from the 52% year-over-year drop. fall in housing starts for multi-family homes. For a while, steady housing starts for single-family homes prevented a significant 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 compared to the previous year.
In addition, the important home renovation market, which boomed during the pandemic and helped boost lumber prices, is also showing signs of weakness. HomeDepot’s comparable sales in the U.S. fell 3.2 percent in the first quarter. One of the reasons for the decline was “lower commitment to larger discretionary projects … such as kitchen and bathroom renovations,” said Billy Bastek, the retailer’s executive vice president of merchandising, at the May earnings call.
Boeckholt, an experienced timber merchant who also publishes the weekly “Woodword” podcast, said he is also seeing signs of declining demand for lumber from retail buyers. Dealers like him are starting to get “premium” lumber that is normally 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 in the United States, has led to a severe decline in demand for wood products, especially compared to projections made just a year ago.
The supply side: A hope-driven “whip effect”
While the demand side of the lumber market is weakening, the supply side may be in an even worse situation. After lumber prices soared 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 upcoming interest rate cuts, which will tend to boost short-term demand for lumber.
The only problem with that plan, says Fastmarkets’ Jalbert, is that it takes years to build new sawmills and increase lumber supply, meaning much of the new lumber supply that was commissioned during the pandemic is only now coming to market – at a time when additional supply is the last thing 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 especially 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 increase production.
What can we expect from wood prices by the end of 2024?
As for the rest of the year, Boeckholt warned that lumber prices could remain near their current pre-pandemic levels, with a modest price increase of about $50 possible in 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 likely to remain stagnant through the end of 2024, but in 2025, he argues, the situation could change. Some sawmills will be forced to reduce or shut down production due to low lumber prices in the second half of the year, which would reduce lumber supply – “the whip in the opposite direction.”
That, coupled with interest rate cuts that could boost demand for lumber, will likely push lumber futures prices into the $500-$600 range, or slightly above pre-pandemic levels, according to Jalbert. “Supply will go down and demand will recover,” he said. “But that will take time.”