It is starting to look like the Oriented Strand Board (OSB) market is about to enter uncharted territory due to a number of very serious economic issues appearing on the horizon. The summer of 2022 could well be a "summer of discontent."
Economic Factors That Could Dictate OSB Prices This Summer and Into the Fall
As things sit now, the U.S. and Canadian economies are teetering on the verge of a recession. It was only a year ago that the lumber market warned us of impending inflation with prices dropping to as low as $450 per board foot and then rebounding to record highs by early fall. When lumber prices rallied into the fall, OSB prices followed suit with home project customers deciding to go with a less expensive building option.
It’s likely that lumber and OSB prices are going to mirror each other over the coming months. It seems inevitable as inflation continues to burn at levels not seen for over 40 years. The reality is it's difficult to read where OBS prices are headed in an economic environment where inflation is fast approaching 10%.
Because of inflation, a number of other economic issues are threatening the welfare of homebuilders. First, mortgage interest rates are rising, which does not bode well for the homebuilding industry. Aside from a few little bumps in the road, the home-building industry has pretty much had its way coming out of the last recession in 2009-2010.
Interest rates started in 2022 at around 3%. At the time, home resales and new home sales were roaring and the overall real estate market was hot hot hot. Unfortunately, the U.S. Fed was forced to start raising the Fed Funds Rate in an attempt to cool inflation. That leaves current mortgage interest rates currently sitting at around 6%. The effect of interest rates doubling has had a profound effect on housing demand and prices at all levels. One could only imagine what would happen if rates breached the 8% to 9% levels, something that is quite possible.
Note: In a June survey conducted by John Burns Real Estate Consulting, it became clear that trouble was brewing. According to a Burns representative, Rick Palacios Jr.:
"Someone turned out the light on our sales in June," an Atlanta homebuilder said in the survey. Meanwhile, a homebuilder in Austin said, "Sales have fallen off a cliff. We're selling one-third of what we sold in March and April."
Further impacting the direction of both lumber and OSB prices has been a recent easing of supply issues. Coming out of slowdowns created by the COVID19 pandemic, it was not clear when North American mills would be able to return to normal activities. That time has come, especially with British Columbian mills recovering from the floods they endured last year. Sure, supply chain problems still exist, but they aren't nearly as relevant when demand is down.
Where does that leave the OSB market headed in the summer and through to the fall?
Where Are OSB Prices Heading?
OSB prices are entering uncharted territory. The term "uncharted territory" refers to a business environment where inflation is high, interest rates are increasing, and housing demand is falling off a cliff. The combination of these factors is making market prognosticators very nervous about making predictions.
There are two current schools of thought in terms of the direction of OSB prices.
OSB Prices Keep Pace With Lumber Prices
First, it is possible OSB prices will continue mirroring lumber prices in terms of percentage of movement. If that were to be the case, the current state of the lumber market seems relevant.
Over the last month, lumber prices have stabilized a little after hitting as low as $528 per board foot in June. While prices seem to have stabilized over the last month at around $700 per board foot, it still feels like the market is searching for direction. The uncertainty is palatable. All we know for sure is homebuilders are seeing demand dry up. If that trend continues for too long, prices are going to weaken as demand dries up and supply continues to expand.
It's possible builders will decide to start stockpiling lumber while prices are low and building activities are limited. That could result in OSB prices and demand trailing with a large customer base out of the OSB market.
Home Projects Drive OSB Demand
It's also possible that D.I.Y.ers could rule the OSB market. OSB products/materials are still materially cheaper than lumber. At a time when homeowners are looking to stay put, they are more likely to opt for home improvement projects over making a move.
If the home improvement industry does pick up steam, OSB prices could see a significant upswing. The reality is consumers are feeling the pinch of inflation. Furthermore, they are living in fear that no end is in sight. In such an environment, they will be seeking affordable alternatives in every aspect of their lives. That's why D.I.Y.ers could well opt for the lower OSB price alternative for their home projects.
It's a tough environment in which to make predictions. Ultimately, the lumber and OSB markets will be looking for signals that an economic turnaround is on the horizon. It's at that point in time that the predictability of these markets will become a lot easier. Until that happens, consumers and homebuilders are very likely to proceed with caution.
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