Lumber prices have gone sideways in the past few months as investors focus on the housing market and the falling commodities market. Lumber was trading at $400 per thousand board feet, which is a few points below the year-to-date low of $361. It has crashed by more than 72% from the highest point in 2022.
Signs of bottoming emerge
Lumber is an important commodity that is mostly used in the housing sector. As a result, lumber prices tend to underperform in periods of high-interest rates and mortgage rates. In the past few months, the Fed has hiked rates from 0% to almost 5% while the average rate for a 30-year fixed mortgage has jumped to almost 6.5%.
The rising interest rates have led to a major slowdown in the housing sector. Housing starts, which measures the annualized change in the number of new residential buildings that began construction, has been in a downward trend. Building permits have also been falling in the past few months. After peaking at 1.89 million in January 2022, permits have dropped to 1.42 million in February.
All these factors explain why lumber prices have been in a strong downward trend in the past few months after surging during the pandemic.
There is a likelihood that the housing market will continue struggling in the coming months. In a statement, a Moody’s analyst warned that house prices will drop by between 5% and 10% in the next 2 years. This view was shared by Jeremy Grantham, who said:
“I don’t expect a crash but I expect house prices to drift back into more affordability. It doesn’t happen overnight, but housing casts a very long shadow and economically is more dangerous than the stock market.”
Affordable home prices could lead to more housing demand, which will lead to higher lumber prices in the near term.
Lumber prices forecast
There are signs that lumber prices are bottoming. On the daily chart, we see that they have struggled moving below the key support level at $361. This price can be said to be a triple-bottom, which is usually a bullish sign. It has moved slightly below the key support at $460, the lowest point in August 2021.
Therefore, while it is too early to tell, and while volume is still low, there is a likelihood that lumber prices will crawl back in the next few months. If this happens, lumber could move to the next key resistance point at $534, which is ~35% above the current level.