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As the price of lumber raced up to over $1,500 per thousand board feet in the spring of 2021, economists acknowledged that the supply side of the economy simply couldn\u2019t sustain the housing demand rush unleashed by the pandemic. Of course, we\u2019d later learn that this inflationary phenomena stretched far beyond housing, and that lumber was actually the canary in the coal mine for inflation at large.<\/p>\n
That predictive power is why economists and analysts alike are once again paying close attention to lumber: After nosediving to $383 per thousand board feet by the end of 2022, the lumber futures price has since jumped 19% to $454 as of Wednesday.<\/p>\n
Does this slight rebound in lumber prices\u2014which floated between $350 to $550 in the years leading up to the pandemic\u2014just mean that lumber is nearing its bottom? Or does it signal some broader rebound in the slumped U.S. housing market?<\/p>\n
1. U.S. housing starts have further to fall<\/strong><\/p>\n U.S. housing starts are expected to drop by double-digits this year. New home sales in the U.S. have been off by 20-30% since the beginning of last year because of plummeting home affordability, triggered by high mortgage rates and high home prices. Cooling demand coupled with a historic number of homes currently under construction, which creates a flow of \u201cshadow\u201d inventory, worsens the oversupply and triggers a pullback in housing starts.<\/p>\n Although it\u2019s widely forecasted that housing starts will drop this year, by how much exactly varies. Housing starts are expected to drop 13%, which leans towards the optimistic side. The outlook is a bit more gloomy for single-family homes, which is expected to fall by 16% in 2023 as mortgage rates continue to hover around 6%. However, for multifamily starts, are expected to drop 7% this year.<\/p>\n The difference between the two outlooks is based upon strong apartment demand that\u2019s expected to pull multifamily starts forward. But supply chain disruptions, labor shortages, rent growth, and challenging financial conditions will put the same downward pressure on multifamily starts as single-family starts.<\/p>\n 2. Lumber demand will drop again<\/strong><\/p>\n U.S. lumber consumption are expected to fall somewhere between 4% and 5% in 2023. In 2022, lumber consumption will probably fell by 1.6% as a result of sudden weakening in new residential construction activity in the second half of the year and a major correction in do-it-yourself (DIY) lumber demand.<\/p>\n Moving forward, the repair and remodeling market will moderate some of the demand losses, while professional remodeling is likely to weaken with the decline in national home prices.<\/p>\n A 4% to 5% decline in lumber consumption (or 2.2 billion board feet) would be the largest decline in a single year since 2009\u2014a year that saw a 8 billion board feet decline.<\/p>\n While this predicted drop wouldn't be catastrophic, it would be challenging for building material retailers, wholesalers, and mill operators.<\/p>\n 3. Record volatility in lumber prices since 2020 is over.<\/strong><\/p>\n The volatility in lumber prices that\u2019s rocked the market since 2020 is over due to the expected decline in demand. And although lean inventory can drive lumber prices up, it can\u2019t do so without demand\u2014so the record volatility seen since the spring of 2020 appears to now be in the rearview mirror.<\/p>\n 4. There's more British Columbia sawmill closures on the horizon.<\/strong><\/p>\n A substantial portion of industry capacity is set to close, because of weak market conditions and constraints to long-term fiber availability. These indefinite or permanent closures are expected to take effect in the Canadian province after several rounds of temporary sawmill curtailments, coupled with weakening demand and lower lumber prices.<\/p>\n This will be a key factor that helps tighten the market, particularly in the second half of 2023 when demand will begin reversing course and the bulk of the production cuts will begin to be felt.<\/p>\n In total, British Columbia sawmill closures are expected to wipe out production capacity of 1.5 billion board feet.<\/p>\n 5. Inflation\u2014 and mortgage rates\u2014will drop significantly in 2023 Inflation will fall significantly in the second half of this year, edging closer to the Federal Reserve\u2019s 2% target. With that, the Fed could choose to stop raising interest rates and in turn mortgage rates could drop, thus revitalizing home buying activity.<\/p>\n That, of course, would be welcomed by both homebuilders and lumber producers.<\/p>","protected":false},"excerpt":{"rendered":" As the price of lumber raced up to over $1,500 per thousand board feet in the spring of 2021, economists acknowledged that the supply side of the economy simply couldn\u2019t sustain the housing demand rush unleashed by the pandemic. Of … Continue reading