Lumber prices continue to fall, and are headed to as low as $350 by August, an analyst says

Lumber prices sawmill US logs wood
Lumber prices plummeted in June.

Lumber futures are sliding after brief pop last week, falling 21% in the last five days as the hot commodity comes down from dizzying highs.

The price of lumber is trading at $642 per thousand board feet, roughly 62% lower from its May 7 peak of $1,670 per thousand board feet.

But the downtrend after scaling to unprecedented highs should be expected, said Troy Merkel, partner and senior real estate analyst at Chicago-based consulting firm RSM. He said he expects the price of the commodity to moderate, especially as supply chains normalize and recover after the last year of the pandemic.

By the end of August and into early September, he told Insider the price of lumber may settle between $350-$450 per thousand board feet due to a confluence of factors, including sawmills slowly reopening and vaccination rates rising.

And while Merkel still sees headwinds for the industry, especially when it comes to labor, he said he is optimistic the market will normalize by the end of the year.

Experts, including Merkel, have long sounded the alarm of a chronic shortage of affordable and available homes in the US.

“People took for granted the prices of lumber,” Merkel told Insider.

The spike in the price of lumber on its own has added $36,000 to the average price of a new home, according to the National Association of Home Builders.

A June 2021 report by the Rosen Consulting Group, a real estate economics consulting firm, found that more than two million housing units need to be built per year in the next decade in order to fill an underbuilding gap of at least 5.5 million housing units.

Homebuilding would need to accelerate to a pace that is well above the current trend, the study said.

But for some, like David Russell, VP of market intelligence at TradeStation Group, an online broker-dealer, the whole market “distortion” of lumber was an aberration caused by the pandemic.

“I think in some ways lumber is really just toilet paper, 2.0. It’s just a symptom of a totally weird situation that has almost never happened in history,” he told Insider. “This recession was caused by something totally external.”

Russell said prices will normalize by the end of the year, though he does not think they will return to pre-pandemic level.

“The likelihood of this happening again is very low,” he said. “This happened exactly because no one thought it was going to happen.”

A number of commodities have surged in part because of distorted supply chains during the pandemic, but lumber in particular has captured people’s attention. When asked why people have been focused on lumber over other commodities, Merkel said: “At the end of the day, people need a place to live. Housing has a personal feel, whether you’re an analyst or a prospective homebuyer.”

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Lumber prices are on pace to plunge 45% in June after a record-breaking rally driven by homebuilding demand

A lumber yard

The price of lumber futures is on pace to plunge 45% in June for one of the largest monthly drops ever, as the hot commodity comes off a record-breaking rally.

Lumber prices have been on a rapid decline since their May 7 peak of $1,670 per thousand board feet.

As of June 30, the price of lumber has slipped around 45% to $721 per thousand board feet- and is now on track to have its worst month since 1978. Exactly a year ago, lumber futures closed at $435.

“I would not be surprised at all if we see the price continue to trail lower than $600 or below toward the year-end,” Mace McCain, president and managing director at Frost Investment Advisors, told Insider. “We will continue to see supply come on board but we will not see demand continue to grow.”

McCain added that this level will be more sustainable for the wood industry and will make housing more affordable.

While it is difficult to point to one specific reason why the price of lumber futures has pulled back, some experts attribute it to the economic reopening, which has caused more people to spend less time at home.

To begin with, the price skyrocketed at the start of the pandemic when restrictions forced Americans to shelter at home, prompting many to either build new houses or renovate existing ones.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign – and shares what investors can do ahead of the eventual crash

Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform, agreed that this range is what he would consider a fair valuation as well.

He has told Insider in the past that the sweet spot would be $600-$900 as this range gives sawmill operators, truck drivers, and other players in the industry more cushion for capital upgrades and operational improvements.

Setzer did express concern that while the prices are much more reasonable now due in part to a more functional supply chain, the industry simply cannot afford another disruption.

“I have strong concerns that we will have interruptions, which will have adverse effects on supply,” he told Insider.

Setzer mentioned the recent wildfires in British Columbia, where the US gets part of its lumber supply, as well as the upcoming hurricanes in Texas and Virginia.

“If the forest is on fire we can’t get logs,” he said. “That will change the tables.”

Apart from supply chain issues, Brad McMillan, CIO at Commonwealth Financial Network, said the wild price fluctuations could also be due to market distortions, where a “real lumber shortage” turned into “something much worse.”

He said this, then, resulted in higher prices, which caused more panic buying, until some sort of limit was “reached.” At this point, which seems to be now, the price will head down, he said.

Earlier in 2021, lumber prices surged, triggered by a confluence of factors – a pandemic, concerns of an overheating housing market, and millennials reaching home-buying age. On top of this, there was already a shortage of lumber supply before the pandemic even began.

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