A volatile and unpredictable lumber market contributed massively to a bumpy ride for the US construction sector during the COVID-19 pandemic – but after recovering from a massive dip in the second half of 2021, prices of that commodity have since plunged once again.
Supply chain snarls helped push lumber costs to a high of $1,645 per 1,000 board feet in May 2021 before those prices plummeted dramatically, bottoming out at just over $450 in August of that year.
A steady climb between then and the following March saw prices recover to $1,460, but they subsequently crashed yet again and slumped to their lowest level since the beginning of the pandemic in May 2023.
During a protracted slump this year prices have remained mired below $400 per thousand board feet for 12 weeks in a row, according to the National Association of Home Builders (NAHB) – the most sustained slump since 2019.
Russ Taylor (pictured top), a wood business and market consultant, told Mortgage Professional America the sharp spike in mortgage rates and borrowing costs since 2022 have weighed down on the lumber market’s performance, and look set to keep activity muted for the foreseeable future.
The “bite” of rates hovering around the 7% mark is especially impacting the repair and remodeling sector, he noted, which marks the biggest lumber consumption segment in the US.
While inventory shortages and high demand contributed to the big jump in lumber prices during the pandemic, mills are now grappling with the opposite scenario: namely, a lack of clamor in the market. “South mills have too much production and the new residential construction market is also now sluggish,” Taylor said.
“In May, housing starts were down about 5.5% and the expectation is that there’s not going to be many more gains in housing until mortgage rates start to inch lower.”
Mills face growing crises amid lumber market volatility
The prospect of borrowing costs remaining higher for longer could keep the market subdued by canceling out cheaper lumber costs and deterring builders from beginning projects, only worsening the problems caused by too much supply.
That’s causing strain for plenty of mills which have been flooding the cash they made during COVID into optimizing their production, Taylor said. “They’ve reinvested into new equipment and sometimes new mills have been built,” he explained, “and now we have too much supply and nobody’s curtailing… in the higher-margin regions.
“So that just means there’s too much supply, nobody’s willing to curtail, and they don’t want to because in many cases the mills don’t want to lose skilled employees. If you slow down too often or curtail too often, skilled employees can be nabbed by another mill or another industry.”
Larger builders are able to offer mortgage buydowns to borrowers, using discounted rates with the expectation that borrowing costs will have dipped to those levels or lower within a couple of years. Still, that’s not an option for smaller builders. “That’s the problem. A lot of the smaller dealers are sort of facing an uphill battle,” Taylor said.
Multifamily condo construction is also plummeting because of high financing costs, while single-family starts dipped in May.
When could borrowing costs finally start to fall?
Markets are currently expecting the Federal Reserve to cut its key rate at least once before the end of the year, with the central bank’s preferred inflation gauge ticking lower last month and recent data indicating the labor market continues to cool.
However, the Fed is continuing to take a cautious approach on the rate front, as decisionmakers repeatedly stress the need to wait for more consistent signs that the economy is trending as hoped before bringing rates lower.
Taylor also noted that a single mild rate cut is unlikely to do much to change buyers’ or builders’ sentiments towards the market. “OK, so the Fed drops a quarter point in, say, November. That’s not going to do anything,” he said. “They’ve got to have three or four reductions before people feel confident where they can get back in the market.”