The double-peak lumber bubble of 2021 and 2022, which once sent housing construction costs through the roof and exacerbated inflation, is now just a memory.
Spot lumber prices have fallen 75% from their May 2021 record of $1,514 per thousand board feet to just $366 this week, roughly around pre-pandemic levels, according to the Random Lengths Composite Lumber Price Index. The decline in lumber prices has been particularly dramatic over the past 90 days in the futures market, with July contract prices falling 28% to $466 per thousand board feet (futures prices are about $100 higher than spot prices due to delivery costs).
Industry experts blame the record drop in U.S. housing affordability and the slowdown in home renovations on the collapse in demand for lumber. It’s simply too expensive for consumers to buy new homes or renovate their current ones. That’s led to fewer construction projects and a slowdown in lumber sales. At the same time, the industry’s overly optimistic demand forecasts, amid hopes of falling interest rates and rising home sales, have led mills to increase supply at the worst possible time.
Put it all together and “it’s an ugly scenario” for the lumber market, said Ashley Boeckholt, director of lumber and risk management at Sitka Forest Products USA. Fortune. “We’re kind of hungover from three great years.”
On the demand side: a record deterioration in housing affordability and a slowdown in renovation
The factors driving lumber prices are varied and complex, but as always, it all comes down to supply and demand. On the demand side, sky-high home prices and high mortgage rates have led to a record decline in housing affordability in the United States in recent years. The Atlanta Federal Reserve’s Home Ownership Affordability Monitor (HOAM) is now at its lowest level since the 2008 global financial crisis.
As a result, despite the ongoing housing shortage, demand for new homes has remained weak, leading to equally weak demand for the wood to build them. “Housing affordability is just a challenge right now,” said Dustin Jalbert, a senior economist who leads Fastmarkets’ wood products team. Fortune. “This is one of the least affordable times to buy a home in decades and the pool of qualified buyers is also starting to shrink a bit. So high interest rates are finally starting to bite.”
Weak demand for new homes sent builder confidence to a five-month low last month, and housing starts fell 19% from a year earlier. Most of this decline was due to the 52% drop in multi-family housing starts from the previous year. For a time, single-family housing starts helped prevent a significant drop in lumber prices, because single-family homes use more wood than collective projects. But that trend also reversed, with single-family housing starts falling 2% from a year earlier in May.
Additionally, the crucial home improvement market, which boomed during the pandemic and helped drive up lumber prices, is also showing signs of weakness. HomeDepot, for example, saw its comparable sales in the United States fall by 3.2% in the first quarter. One reason for the decline is “lower commitment to larger, discretionary projects…such as kitchen and bathroom remodels,” noted Billy Bastek, the retailer’s executive vice president of merchandising, during the May earnings conference call.
Boeckholt, a veteran lumber trader who also hosts the weekly “Lumber Word” podcast, said he is also seeing a drop in demand for lumber from retail buyers. Dealers like him are starting to receive “premium” lumber that is typically reserved for the Home Depots and Lowes of the world. “That generally means there’s a pushback” from retail buyers at home goods centers, he noted.
This slowdown in home improvement, combined with ongoing housing affordability issues in the United States, has resulted in a severe lack of demand for wood products, especially compared to what was predicted just ago a year.
On the supply side: a hope-driven “bullwhip” effect
Even though demand in the lumber market is struggling, the supply situation could be even worse. After lumber prices soared in 2021 and 2022, the timber 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 imminent interest rate reductions that tend to boost demand for lumber in the short term.
The only problem with this plan, as Jalbert of Fastmarkets explains, is that it takes years to create new sawmills and increase the supply of lumber. That means much of the new lumber ordered during the pandemic is only just hitting the market, at a time when additional supply is the last thing the industry needs.
“It’s a classic whip,” Jalbert noted. “Supply (reacts) the same way to demand, and by the time it hits the market, the demand situation has already changed – and in this case, negatively.”
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 too much “d ‘hope’ for increased demand. This is particularly true “in the southern United States, where plants have been under construction for three or four years and finally started up last year,” he said, adding that there also had a lot of investment in older factories to increase production in many parts of the country.
What to Expect for Lumber Prices Through the End of 2024
As for what to expect for the rest of this year, Boeckholt warned that lumber prices could languish near their current pre-pandemic levels, with the possibility of a minor increase — of around $50 — in prices in the fourth quarter. “There was a lot of hope out there, so when we wipe out all that hope — which will eventually happen — that’s when we hit bottom,” he said.
Mr. Jalbert also believes that lumber prices will likely stagnate until the end of 2024, but that in 2025 the situation could improve. Some sawmills will be forced to slow or stop production due to lower lumber prices in the second half of the year, reducing the supply of lumber, “the blow whip in the opposite direction.
Jalbert says that, coupled with interest rate reductions that could fuel demand for lumber, will likely bring lumber futures prices into the $500 to $600 range, or slightly above pre-pandemic levels. “Supply will be reduced and demand will recover,” he said. “But it’s going to take time.”