Additional Coverage:
- Lumber prices are plunging. Blame the record drop in U.S. housing affordability and a post-pandemic double bubble ‘hangover’ (newsbreak.com)
At Clifford Lumber in Hinesburg, Vermont, 67-year-old Warren Rotax is seen stacking boards of tongue and groove pine on June 19, 2024. The lumber mill, started by Harold Clifford in 1929, is now managed by his grandson, Lynn Gardner, and his son, Peter Gardner. (Photo courtesy of Robert Nickelsberg/Getty Images)
The once soaring lumber prices that significantly pushed up home construction costs and fueled inflation during the twin-peaked lumber bubble of 2021 and 2022 have now drastically fallen. According to data from Random Lengths’ Framing Lumber Composite Price Index, lumber prices have decreased by 75% from their pinnacle in May 2021, dropping from $1,514 per thousand board feet to a current rate of $366, returning to levels seen before the pandemic. In the futures market, the slump has been notably sharp over the past 90 days, with contract prices for July decreasing by 28% to $466 per thousand board feet, notably higher than spot prices due to added delivery costs.
Experts attribute this significant drop to decreased demand driven by a dip in U.S. housing affordability and a downturn in home remodeling activities. The high cost of buying or renovating homes has led to reduced construction projects and a slowdown in lumber sales. Moreover, the lumber industry’s overly optimistic expectations about demand—fueled by hopes for dropping interest rates and increasing home sales—resulted in increased lumber supply at the least opportune time.
Ashley Boeckholt, director of lumber and risk management at Sitka Forest Products USA, described the market’s current state as a challenging aftermath of three prosperous years, calling it “an ugly scenario.”
Demand has waned due to a combination of skyrocketing home prices and increased mortgage rates, leading to a historic drop in housing affordability in the U.S. The Atlanta Federal Reserve’s Home Ownership Affordability Monitor shows affordability levels are the lowest they’ve been since the Global Financial Crisis in 2008. This low affordability, coupled with high interest rates, has diminished the pool of qualified buyers and slowed the demand for new homes, which in turn affects lumber demand.
Furthermore, the market for home renovations, which had surged during the pandemic and helped prop up lumber prices, is showing signs of weakness, as evidenced by a 3.2% drop in comparable U.S. sales at HomeDepot in the first quarter. Reduced engagement in projects like kitchen and bathroom remodels has been noted as a contributing factor to this slowdown.
On the supply side, the lumber industry’s response to the 2021-2022 price surge by increasing production capacity has backfired. Many in the industry misread the market’s long-term demand forecast, expecting a boost from the housing shortage and anticipated interest rate cuts. However, this increased supply is hitting the market at a time when demand is falling, exacerbating the problem.
Looking forward, Ashley Boeckholt suggests that lumber prices may not see significant changes through the end of 2024, with a possibility of minor increases. Nonetheless, Dustin Jalbert, a senior economist at Fastmarkets, predicts that a reduction in sawmill production in the latter half of the year could eventually lead to a slight recovery in prices by 2025.
This adjustment, alongside potential interest rate cuts, could help stabilize the market. However, a recovery in demand, coupled with an adjustment in supply, will need some time to materialize.