Home Construction: Big Drop in Lumber Prices and Headed Lower

What a difference a month makes! Lumber prices were at a staggering all-time high at the beginning of May. Over the last few weeks they've dropped more than 20%. In the securities world, that's enough of a drop to call it a "bear market." Prices are still much higher than they were before the pandemic, but they have ratcheted down substantially from their peak. Lumber prices topped $1,500 for a thousand board feet at the end of May, on May 28th. Since then, they have tumbled from their $1,515 high to $1,210, according to an industry trade publication cited by Fortune. (1) That's a tad more than 20%. Lumber Prices Drop 20% This is great news for homebuilders and do-it-yourselfers who've stalled on projects because of the high prices. The National Association of Homebuilders says that the cost of lumber has added an extra $36,000 to the price of a new home, compared to April 2020. It also added about $119 a month for rent on a new apartment. In the midst of the current building boom, builders balked at the cost of lumber and May housing starts pulled back. They were down 8.8%. Home improvement sales were also down by almost as much, but not only because of high prices. The DIY dip also coincided with the lifting of pandemic safety measures, and less interest in doing projects at home. Meanwhile, the experts say that loggers and sawmills have been ramping up production because they are fetching more money for their products. That has injected more inventory into the supply chain, but as inventory grows, prices retreat, which is what's happening. Fortune reports that southern loggers increased production to a 13-year high this last April. (2) Demand is Still Skyrocketing Prices haven't done a complete reversal however, because demand is still skyrocketing, especially among homebuilders. New home construction hit a 14-year high in March, and fell back somewhat in April. But it was still 22% higher than April of 2019, and 67% higher than April of last year. One commodity trader told Fortune: "The backlog is just too strong. There are too many places to put wood." And we're coming off a year that's marked by a historic lumber shortage. Sawmills cut production at the beginning of the pandemic. They were worried about a housing crash so they also unloaded a lot of their lumber stock and then the crash didn't happen. Instead, there was a recession-inspired housing boom that included a large number of millennial home buyers. There were also many bored homeowners in lockdown who decided to upgrade their homes. Editor Shawn Church of Fastmarkets Random Lengths told Fortune: "What we're seeing right now is that of all the factors that contributed to the record run, those trends have eased or turned over and are incrementally contributing to the drops." (3) As I mentioned, the turn-around began just a few weeks ago in conjunction with the lifting of pandemic restrictions, and slower home improvement sales. Retailers Surprised by Price Drop That caught many big-box retailers by surprise. Nils Martinsson of Sherwood Lumber told Fortune: "Home centers across the country forecasted greater demand from the DIY sector this year based on the frenzied pace we saw over the past 12 months." He says consumers are now more focused on lock-down free activity, and that has loosened up the supply and brought prices lower. Fortune reports that prices will probably continue to fall, based on lumber futures. But the big question is "by how much." They peaked on May 10th at more than $1,700 for July delivery contracts. As of last Tuesday, on June 15th, they were just $1,010. The futures show September contracts at $907. So the momentum is bringing lumber prices lower. But those prices are still double to triple what they were before the pandemic. Back then they'd range from $350 to $500 per thousand board feet. And demand hasn't dried up. It may have slowed down a bit, but it's still going strong. The Wall Street Journal says that: "Lumber producers and traders expect that prices will remain relatively high due to the strong housing market, but that the supply bottlenecks and frenzied buying that characterized the economy's reopening… are winding down." (4) Shadow Inventory Boosts Supply The Journal also says that many builders were hoarding lumber to make sure that they didn't run out, and are now selling their excess inventory. This so-called "shadow inventory" increases the availability of lumber, and puts downward pressure on prices. But over the long-term, current inventory issues are just a drop in the bucket compared to what will be needed to increase the housing supply. One lumber producer told the Journal: When you think about the amount of housing that we're going to have to build in the U.S. over the next three, five, 10 years, that's just a significant amount of demand for wood products." If you want to read more on this topic, check the show notes for links to our sources at NewsForInvestors.com Click here to join RealWealth now, it's free and only takes a minute! Links: 1 - https://fortune.com/2021/06/16/lumber-prices-falling-2021-chart-update-price-of-lumber-going-down-wood-costs/ 2 - https://fortune.com/2021/06/10/lumber-prices-2021-chart-price-of-lumber-production-wood-supply-costs-update-june/?queryly=related_article 3 - https://fortune.com/2021/06/04/lumber-prices-housing-market-costs-back-down/?queryly=related_article 4 - https://www.wsj.com/articles/lumber-prices-are-falling-fast-turning-hoarders-into-sellers-11623749401