With mortgage rates skyrocketing, the building materials and lumber industry is starting to really feel the pinch. In recent days, lumber prices per 1000 board feet fell by as much as 6% in a single day. That's a significant 1-day drop considering the beating lumber prices have taken since the end of February 2022.
As a reminder, lumber prices hit an all-time high in early May of 2021 with a peak price of nearly $1,695 per 1000 board feet. From that point on, prices have been riding a roller-coaster, dropping to $454 per 1000 board feet on August 16, 2021, only to rise again to $1,465 per 1000 board feet on February 28, 2022. From that point to today, September 16, 2022, the drop in lumber prices has hit an astounding 67%.
What's Been Driving Lumber Prices in the Past 200 Days?
Coming out of the COVID19 pandemic, there were hopes within the North American real estate industry that builders would get back to building and home buyers would be plentiful. That would have brought lumber prices down to a more affordable level. Initially, it looked like that is exactly what was going to happen. Unfortunately, nothing went forward as expected.
It's important to remember that lumber prices had been remaining high partly because of the time it took North American lumber mills to get fully operational after the pandemic. On top of that, there were weather issues in Canada, causing further delays in getting milled lumber into the marketplace.
Eventually, supply and demand for lumber equaled out, which caused lumber prices to start easing in the Spring of 2022. While a rebound looked promising in the real estate industry, which would have kept lumber prices stable, inflation had other ideas.
About the time the worldwide supply chain broke in late 2021, demand for goods and services remained high as Americans and Canadians were ready to start spending again. With a majority of goods in short supply coupled with the increase in gas prices, inflation caught on fire. By the time inflation hit 5.4% in the U.S. in September of 2021, the warning sirens started blaring.
From September 2021 until June 2022, inflation rose a magnificent 3.7% to a 40-year high of 9.1%. Some economists even claimed the number was low and should have been closer to 11%. When inflation rises like this with no signs of easing, the U.S. Federal Reserve has to take action.
Economic theory makes it clear that the only way to douse the first of inflation is to dry up the money supply so people will stop spending. The best way to dry up the money supply is to increase interest rates. When interest rates start rising, prospective home-buyers are generally forced to the sidelines. That's where the country is today with mortgage rates well over 5% and inflation is still lingering around 8.5%.
This summarizes why lumber prices have fallen by 67% in just a little over 6 months. Money is too expensive, which keeps home-buyers out of the market and home builders from building new homes. If home builders aren't building new homes, lumber is going to be sitting in warehouses until demand increases or prices get so low that builders start stockpiling inventory for future use.
How low can lumber prices go? In March of 2020, the start of the pandemic, lumber prices dropped to as low as $264 per 1000 board feet. If inflation stays high, that price could well be the target price going forward.
The Outlook for Lumber Prices Through the Rest of 2022
There is also little evidence that the supply chain issues have been sufficiently addressed, which means the cost of household goods will likely remain high. Combined with the current gas prices this adds up to high inflation through the rest of this year and into the Spring of next year.
As recent as the end of August, U.S. Fed Chairman Jerome Powell indicated the Fed is moving forward with a least one more significant Fed Rate increase. Mortgage lenders will be forced to continue putting upward pressure on mortgage rates, which are likely to approach 6.5% by the end of 2022.
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Clearly, lumber prices are going to be subject to downward pressure through the rest of 2022. As stated before, it's possible builders will step in when prices of lumber get too low. They simply would not want to bypass the opportunity to stockpile cheap lumber for use in the future. Whether they will or not is subject to debate because of the cost of securing money for large lumber purchases.
Here's the caveat, all meaningful evidence says all of North America is in a recession. The depth of this recession is likely to be significant given the fact economies have been running recession free for over 10 years. How much the economies in the U.S. and Canada will contract is up for debate. However, it's a good bet that the lumber and home building industries will be looking to err on the side of caution.
With so much much uncertainty in the U.S., decision-makers are likely to stay on the sidelines until they get some kind of clarity. This would likely keep downward pressure on lumber prices until there is a stronger sense that North American economies are headed towards some kind of recovery.
In the meantime, home builders and DIYers might want to take advantage of low lumber prices so they can complete those much-needed remodeling projects. Now would be the time given the possibility lumber prices will explode upward as the recession comes to an end and mortgage rates start to ease.
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