Lumber Prices will Fall Back to Pre-Pandemic Levels within a Year Amid Considerable Volatility
Isabelle Lee | Excerpted from Market Insider
Prices for lumber futures have descended to levels not seen since November 2020, erasing this year’s dizzying gains amid a cooling demand for the red-hot commodity.
Lumber prices fell for the 10th consecutive week to trade at $536 per thousand board feet - 67% lower from their May 7 peak of $1,670 per thousand board feet. Around a year ago, the commodity was hovering just above $400.
Despite weeks of decline, there is likely room to fall further, said Stuart Katz, CIO at wealth management firm Robertson Stephens. He said the price of the commodity could reach its pre-pandemic level in the next 12 months, but whether prices remain at that level is the real question.
“This is a dynamic economy,” he said. He added that in order to predict the price of lumber, one must make a number of assumptions about the Federal Reserve’s monetary policy and the ability of home builders to pass along price increases or take margin compressions.
“You can't lean on history when you turn off and then reopen the largest economy on the face of the earth,” Katz said. “No one has the crystal ball, so you need to look at the key fundamentals which provide push and pull pressures on, ultimately, the equilibrium of the price.”
One thing he is certain of is that the price trends will vary by geography.
“There may be regional aspects of this,” Katz said. “There's an aggregate lumber price but because of some of the secular trends in home building and multifamily units... I could see there being local geographic tensions and prices that would maybe make it more elevated than if you went to broad headline price.”
Katz said the Sunbelt states could continue to see heightened lumber prices as people move to the region from other parts of the US and drive up demand for housing.
Lumber prices at the start of the year surged, triggered by factors including concerns about an overheating housing market and millennials reaching home-buying age. But the main culprit behind its astronomical rally was the pandemic.
“I think it's difficult to imagine a set of facts to support lumber prices going in excess of $1,600 per thousand for feet in the absence of the circumstances of the COVID crisis,” he said.
For some experts, the lumber phenomenon was a long time coming, especially given the chronic shortage of affordable homes for sale in the US.
Still, lumber wasn't the only commodity that rallied this year despite the heightened interest. Many others from oil to copper also gained due in large part to distorted supply chains.