As some experts warn of a coming U.S economic decline, there are currently great concerns throughout the world, as the potential decline in the U.S. often affects foreign economies around the world.
With inflation running out of control and interest rates starting to climb, several key industries are bracing for the impact.
One of the industries beginning to feel the strain of inflation and increasing interest rates is the commercial/residential real estate industry. Subsequently, subordinate industries, such as construction and lumber, also feel the pinch.
So how exactly is the current economic environment affecting the lumber industry here in 2022?
The Volatility of the Lumber Market in 2022
It’s hard to imagine that any industry has seen more volatility over the last year than the North American lumber industry. Lumber prices have been riding a rollercoaster over the last 13 months. Here are some of the hard facts.
In May 2021, coming out of the COVID19 lockdown environment, lumber prices per thousand board feet hit an all-time high at $1,645 as inventories fell short of demand. However, as lumber mills were finally able to get back to work, inventory quickly grew, and by August 2021, lumber prices dropped by an astonishing 346% to $474 per thousand board feet.
After that, lumber prices stabilized until a late fall/early winter surge that saw prices surge once more to as high as $1,441 per thousand board feet by February 28, 2022.
At such exorbitant prices, demand dried up as homebuilders and DIYers waited for prices to ease. And once again, we are seeing a dip in lumber prices.
In the last couple of weeks, lumber prices have dropped by as much as 42% (from $1,039 to $600 per thousand board feet) before settling at a current price of around $616 (6/3/2022).
That’s quite a pricing ride over any 13-month period. Never in the history of lumber prices has North America experienced such price volatility.
Now smart companies are bolstering inventory for future jobs.
Current Prognosis for the U.S. Economy and the North American Housing Market
Heading into the summer months, DIYers are sure to take advantage of the low lumber prices as they take on their summer home improvement and remodeling projects.
At the same time, U.S. homebuilders are looking at a very slow summer that could bring new construction to a halt. With the welfare of the lumber industry hanging in the balance, here’s where the U.S. economy could be headed in the next few months.
Due to political upheaval, job insecurity, and fallout from COVID19, the U.S. along with the rest of the world, is going through a sort of metamorphosis, struggling to bounce back.
Supply chain channels are struggling to reach pre-COVID19 homeostasis. Oil prices are out of control. And the U.S is experiencing inflation levels that have not been seen since the 1980s.
All this along with the spike in housing pieces and a threat to raise interest rates leads some economists to worry about a looming recession.
If the real estate industry gets hit by higher interest rates, subordinate industries like lumber are going to get hit. Maybe hard-hit.
As of June 4, 2022, the prognosis for the economy in North America is worrisome. Leading economists are predicting a recession that could adversely affect the real estate industry.
This eventuality could lead to a rise in unemployment rates such as we saw in the 2008 recession. It's hard to fathom just how bad the impact could be to homebuilders, as well as the rest of the world.
Experts contend that the home buying/renting feeding frenzy of the last few months is about to come to a scorching halt as mortgage rates rise.
The Federal Reserve is looking to increase interest rates by at least 1% at their next meeting later this month. As a result, new homebuyers may be asked to take on 6% mortgages.
Moreover, that 1% increase will likely be followed by a series of interest rate increases throughout the rest of the year, which could be devastating to the real estate industry, and therefore all the subsequent industries such as construction and lumber.
So How Exactly Would a Recession Affect Lumber Prices?
It's hard to predict where lumber prices will go from here. One can only assume prices will continue dropping until homebuilders decide to start stockpiling inventories for future use. And it’s possible, with the current low prices, that DIYers will take on more home remodeling projects instead of looking at new home purchases. This might help stabilize lumber prices in the short term. But what about the long-term?
The last significant recession began in 2008, dramatically affecting the real estate and mortgage industries. During that time, lumber prices dropped as low as $200 per thousand board feet (adjusted for price index increases and inflation over the last 13 years). A prolonged recession and mortgage rates in the 7% to 8% range would certainly expose lumber prices to a similar fate.
Currently, big retailers like Home Depot and Lowes are reporting strong lumber inventories, so they are not currently making large purchases. The homebuilding industry has seen a 6% decrease in new home demand and prices so far this year, so they, too, are not buying up much inventory.
It’s unlikely, during a recession, that DIYers will demand enough lumber to stabilize prices. Especially since home improvement projects will likely take a backseat to the rising costs of food, gas, and other consumer products.
The timing could not be worse for North American lumber mills. They have to make production decisions at a time when North American economies are headed in a worrisome direction.
Soon, winter will arrive in Canada and northern U.S. states, which might bolster lumber prices as constricting weather conditions keep lumber mills from returning inventories to normal levels, and therefore the supply is lowered, offering some support to lumber prices.
Some companies are going a step farther. The current call from top lumber producers like Canfor is to keep reduced production levels in place until further notice. Here is what Canfor CEO Don Kayne told investors during a recent earnings call:
"The global supply chain crisis has had a significant impact to Canfor and Canfor Pulp in recent quarters. This has resulted in operational downtime with our sawmills in Western Canada currently running on a reduced schedule to manage excess inventories at our mills." He further made clear that he expects such issues to remain in effect for at least the next few months.
What Saves the Lumber Industry?
Bringing inflation under control.
Oil prices and supply chain issues are driving inflation. Rising inflation causes The Federal Reserve to increase interest rates until inflation is stymied and sent into a downward trajectory. We all know what interest rates do to the real estate industry. We also know how a fall in new home demand impacts lumber prices.
The only thing that will likely save the day for lumber prices is winning the battle against inflation. As of now, it looks like that is going to be a long battle. In the meantime, no one should be shocked to see lumber prices stabilize in the $200-$300 range until something spurs demand.
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