The past couple of years have been highly volatile for lumber prices, topping $1,500 per thousand board feet in 2021 and $1,400 per thousand board feet in 2022. Lumber has plummeted nearly 50 percent year to date, to below $600, but the raw material has experienced a modest rebound from recent lows over the past week.
Since lumber’s peak in late February, conditions have deteriorated for the commodity, as it had failed to join the broader commodities boom this year. The S&P Goldman Sachs Commodity Index, a benchmark for commodity investments, has climbed close to 18 percent so far in 2022.
However, after a whirlwind performance during the pandemic and during the economic recovery, the critical construction material is on the path to stabilization, says Jeremy Bowman, a contributing analyst at The Motley Fool.
“The decline in lumber prices is also part of a broader pullback in commodities prices, as traders seem to be anticipating a more normalized global economy without the supply chain woes that have hampered the economy over the last year or so,” Bowman told The Epoch Times. “It seems like the lumber market is finally starting to normalize as the housing market settles down and COVID-related challenges are mostly gone.”
The sizzling U.S. housing market is experiencing a cool breeze, with many data points suggesting that real estate demand is easing amid rising interest rates. This new trend is also weighing on new home construction levels, diminishing lumber consumption throughout the U.S. economy. The latest developments have seen the industry—at home and abroad—respond by cutting supply.
New homes under construction at a development in Novato, Calif., on Mar. 23, 2022. (Justin Sullivan/Getty Images)
In Canada, West Fraser Timber Co., one of the top lumber producers, announced reductions in production at two British Columbia sawmills. This is equal to about 2.5 percent of its total North American capacity. The company is also lowering plywood output at another factory.
Mortgage applications have been mostly down this summer. In the first week of August, mortgage applications edged up just 0.2 percent, according to the Mortgage Bankers Association (MBA).
“The purchase market continues to experience a slowdown, despite the strong job market,” Joel Kan, MBA’s associate vice president, said in a statement. “Activity has now fallen in five of the last six weeks, as buyers remain on the sidelines due to still-challenging affordability conditions and doubts about the strength of the economy.”
Following a substantial 6.6 percent gain in January, existing home sales have fallen for five consecutive months. National Association of Realtors data show that existing home sales dropped 5.4 percent to a two-year low of 5.12 million units.
Census Bureau numbers highlighted that new home sales plunged 8.1 percent in June, to a seasonally adjusted annual rate of 590,000 (pdf). Moreover, new residential property sales declined in five of the first six months of 2022.
Construction spending dropped 1.1 percent in June, down from the 0.1 percent boost in the previous month. This represented the largest monthly decline since February 2021.
The NAHB/Wells Fargo Housing Market Index (HMI), a monthly sentiment survey of the National Association of Home Builders (NAHB) members, eased for the eighth straight month. In August, the index eased to 49, below the market forecast of 55. This represented the lowest reading since May 2020.
“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” NAHB Chief Economist Robert Dietz said in a statement. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”
July building permits and housing starts data will be published on Aug. 16. Trading Economics projects that building permits will slip 1.2 percent, to 1.67 million, while housing starts will jump 1 percent, to 1.57 million. In June, housing starts fell 2 percent month over month, the lowest since September 2021. Building permits edged up 0.1 percent.
Although lumber prices have been trending lower for much of the year, near-term factors could still support elevated prices, Bowman notes.
One of these is the immense transportation delays in western Canada, which is “a key lumber market for several operators,” Bowman says. Marine, rail, and trucking backlogs—driven by the international supply chain crisis—have significantly impacted lumber and pulp companies this year, slowing down the rate of output and shipments.
Labor shortages are still prevalent in the industry, forcing companies to pay higher wage rates, which have taken “a bite out of profits for timber harvesters,” Bowman says.
“Of course, the industry is still vulnerable to potential supply shocks like natural disasters, including wildfires or what happened last year with the flooding in British Columbia,” he said.
But with the U.S. economy in a technical recession, the housing market slowing down, and borrowing costs surging, market observers don’t anticipate lumber prices to break above $1,000 again. This could mean that the great reset of the lumber market could be unfolding.
September random length lumber futures rose $5.30, or 0.9 percent, to $594.00 per thousand board feet on Aug. 15 on the Chicago Mercantile Exchange.
By Andrew Moran
August 15, 2022 Updated: August 15, 2022