Lumber prices hammered – could softer demand of houses be the culprit?

Lumber futures are now trading below the $600 per-thousand-board-feet level, which was seen last time in November of 2021. 

Current lumber prices are down 60% from a peak of $1,480, seen in March, as U.S. new home sales hit a two-year low. 

Furthermore, since the last time Finbold reported on lumber, supply chain issues were easing, and are now seemingly over as better spring weather has helped sawmill outputs increase. 

Is a housing bubble brewing?

Meanwhile, housing prices in the U.S. are higher than they’ve ever been and it seems there are no signs they will stop. Namely, the median U.S. home listing price was $447,000 in May 2022, an all-time high, marking an increase of 37.8% compared to May 2019.  

Judging by the prices, market participants could see similarities between today’s market and the one that preceded the great housing bubble in 2008. Yet, there are marked differences, since no large lending practices covered by bad debt have been done by the largest banks, also commodity prices have been running wild in 2022, which helped housing prices increase.  

Softening demand

Total housing inventory in the U.S. increased to 1,030 thousand in April from 950 thousand in March of 2022, which indicates that there is a buildup of inventory of new homes, possibly alluding to a weakening housing market. In essence, the supply present in April represents a nine-month supply of new homes since that is the time needed to sell the inventory given the recent housing sales.

This potential decrease is mostly attributed to the Federal Reserve’s (Fed) battle with inflation, which led them to increase interest rates and signal more moves to come. Furthermore, higher rates mean higher mortgage costs, while high mortgages mean more expensive houses. 

Looking back through history it is evident that housing starts to outperform as soon as the peak interest rates have been hit; however, at the moment it is difficult to gauge where Fed will go with rates and how long inflation will remain high. 

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