Every now and then, consumers get a look at how the "Laws of Economics" actually work. For someone who is not prepared to face the inevitable, getting hit by the Laws of Economics can feel like getting hit in the face by a boxer.
During 2021, the lumber market had moved in violent swings due very much to the aforementioned Laws of Economics. What we are referring to is the way supply and demand affect the pricing of commodities or merchandise. For anyone who might be wondering about the specific law of supply/demand, here are the basic rules:
- When supply is low and demand is high, prices will rise
- When supply is high and demand is low, prices will fall
- When supply is adequate to meet demand, prices will stabilize
Let's take a look at what is transpiring in the lumber market heading into 2022.
The Rises and Falls of Lumber in 2021
If you look back to the spring of 2021, you would see that lumber prices were rising at breakneck speed. The rise in prices eventually topped out at around $1,733 per thousand board feet in mid-May. At the time, the high prices were being blamed on lumber shortages due to the COVID19 pandemic that lowered employment numbers within the lumber manufacturing industry. Some of the blame was also attributable to homeowners who took advantage of work closures to address home DIY projects that required lumber purchases.
After a rash of spending on lumber by home developers and homeowners in the first half of 2021, prices started to drastically fall as the demand suddenly dried up. Unbelievably, prices had dropped below $400 per thousand board feet by the time summer was coming to an end. That's a drop of 70% from May highs. Yes, the supply completely dried up, leaving industry experts to contemplate just how bad things might get.
By mid-September 2021, lumber prices began to stabilize and start inching upwards.
Initially, prices topped out at $787 per thousand board feet on October 14, 2021. Inexplicably, prices dropped again, going as low as $520 per thousand board feet on November 12, 2021. Experts quickly attributed this drop to seasonal factors and weather conditions that slowed home building and repair activities.
While the drop was seasonal, the sudden surge that took place in the last 6 weeks was nothing if not unexpected. As of December 29, 2021, prices had risen to $1,172 per thousand board feet, a 125% from November lows. Quickly, experts began piping in on the cause of this incredible rise. In the next section, we will look at what has been recently happening and where lumber prices might be moving.
The Rise in Lumber Prices Late in 2021 and a Look Into the Future
Today (January 5, 2022), lumber prices are sitting at $1,159 per thousand board feet. That is indicative of some price stabilization in the last week or so.
There are three theories abound about why lumber prices increased so much towards the end of 2021 after falling dramatically in May 2021. The first theory might well be the easiest to understand. Unfortunately, inflation is white-hot in America. No industry has been able to escape the grips of an inflation number that is the highest it has been in 40 years. Also, there are valid concerns that inflation is going to get worse before it gets better. Perhaps, lumber prices might take a dip if homebuilders and homeowners struggle with cash flow issues that could squelch some demand.
We suspect prices will continue to rise until at least March/April, and we could even see numbers as high as the record setting May 2021.
Theory two points squarely at supply issues. At the start of the current rise in lumber prices, the supply of lumber was short and demand increased as lumber consumers decided to stockpile inventory while prices were low. The problem was lumber manufacturers fell behind the supply curve. Why?
It's no secret that the world is having supply chain issues. It would seem the beast COVID19 is still having a profound effect on the ability of transportation resources to fulfill orders in a timely manner. The effects are being felt in shipping ports and railways all over North America and other parts of the world. After factoring in possible weather issues in Canada and northern America lumber country, supply figures to remain short.
Theory three offers a more subtle insight into what is happening in the home development industry. It turns out that many major home builders were putting off inventory purchases until the end of 2021 and heading into the new year. The pressure this demand is putting on suppliers isn't going away any time soon. Why?
There is a population shift taking place in America.
A lot of this is happening because residents are moving away from crime and pricing issues in historically populated states and cities. A massive number of people are leaving California and New York for states like Texas and Florida, the receiving states are facing housing issues. There aren't enough houses to meet demand.
Most of the people leaving these states are homeowners. They are selling their homes, securing huge profits, and looking to buy new homes in their new states. It's been a long time since America has seen this kind of sudden demand for housing over such a short period.
The combination of these three theories, all of which seem to be valid, seems to point to lumber prices continuing to go higher at least through the first quarter of 2022. Will prices reach $1,700 per thousand board feet again? Maybe. It is not beyond the realm of possibility due to the fact we don't know when inflation will slow and supply chain issues will get resolved.
It would seem the only chance prices will slow is if the above issues for homebuilders and homeowners to put their current plans on hold until lumber prices start to drop. By the end of January, we should have a better idea of what the rest of the year holds for lumber prices.
