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.
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.
“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.
The price of a plywood substitute that used to be cheap is hitting repeated record highs, adding to the already skyrocketing cost of building a home in North America.
Oriented strand board, or OSB, traded at $1,527 per thousand board feet in June, marking a 97% increase since the start of 2021, according to Bloomberg data.
The rally in OSB is due in part to a storm in Texas earlier this year that caused a shortage in resin, a chemical substance needed to make the product.
OSB is a versatile wood panel that shares many of the characteristics of plywood but at a more affordable price. It is a combination of wood and adhesives and is structurally stable and lightweight.
The wood industry has been one of the biggest beneficiaries of the pandemic, as more people built and renovated their homes. When new home construction and home-improvement sales boomed earlier this year, inventory for lumber and OSB, among other commodities, were running low.
A late-day surge helped lumber prices avoid a seventh straight daily decline as the commodity’s blistering 250% rally over the past year whipsaws.
Prior to the recovery, lumber futures traded down 2.41% to $1,237 per thousand board feet on Wednesday. Despite the rebound, the commodity is still down roughly 20% from its May 7 record high of $1,670.50 per thousand board feet.
As lumber prices fluctuate, local news outlets continue to reveal the effects of historically high lumber prices on consumers.
ABC’s Louisville outlet reported the story of Kenny Marine, the founder of Kentucky Hot Brown Pedalboards, who says his costs have more than doubled since last year.
“Something last year that cost me $12, $14 is costing me $30, $35, $60 in some cases depending on what wood I buy, and that’s the killer right there,” Marine told ABC.
CBS’s affiliate KXAN in Williamson County, Texas, reported that the construction of a new county-run children’s advocacy center is on hold due to increasing construction costs brought about by the spike in lumber prices as well.
Republicans have used rising lumber prices and inflation concerns as political tools to attack President Biden’s administration.
Rep. Bob Gibbs, R-Ohio, who serves on the House Oversight Committee’s environment subcommittee, told FOX Business that increasing lumber prices are “just one of the many indicators that President Biden is failing American workers.”
“Lumber prices are an issue that has many causes, from economic complications from the coronavirus pandemic to difficult trade issues with Canada. Biden has shown he is either unwilling or incapable of tackling these obstacles,” Gibbs told FOX Business.
The representative is referring to a proposed tariff hike on imports of Canadian softwood lumber. The US Commerce Department recommended doubling tariffs on Canadian softwood to 18.32% from 8.99% just two weeks ago despite rising lumber prices.
However, it’s important to note a similar tariff was originally imposed by the Trump administration before a decision favoring Canada by the World Trade Organization caused the tariff to fall to around 9% late last year.
The US Commerce Department recommended a more than doubling of the tariffs on Canadian lumber last Friday despite a meteoric rise in prices and demand for the commodity.
Specifically, the department recommended the “all others” preliminary countervailing and anti-dumping rate move to 18.32% from 8.99%.
The proposed rates are subject to further review over the next six months before final duties are set sometime in November.
Former President Donald Trump’s administration imposed a similar 20% tariff on Canadian softwood in 2018, but lowered it to around 9% late last year after a decision favoring Canada by the World Trade Organization.
The move to increase tariffs on Canadian lumber suppliers comes as lumber prices have risen over 275% since last April alone. Canada’s share of the US lumber market sits at around 25% as well, according to the Wall Street Journal.
On May 22, National Association of Home Builders chairman Chuck Fowke released a statement criticizing the move to increase tariffs.
“At a time when soaring lumber prices have added nearly $36,000 to the price of a new home and priced millions of middle-class households out of the housing market, the Biden administration’s preliminary finding on Friday to double the tariffs on Canadian lumber shipments into the U.S. shows the White House does not care about the plight of American home buyers and renters who have been forced to pay much higher costs for housing,” Fowke wrote.
“The administration should be ashamed for casting its lot with special interest groups and abandoning the interests of the American people,” he added.
Canadian authorities also rebuked the newly proposed tariffs.
“US duties on Canadian softwood lumber products are a tax on the American people. They make housing less affordable for Americans and hinder economic recovery from the COVID-19 pandemic,” said Mary Ng, a Canadian MP and the minister of Small Business, Export Promotion, and International Trade.
“We will keep challenging these unwarranted and damaging duties through all available avenues. We remain confident that a negotiated solution to this long-standing trade issue is not only possible, but in the best interest of both our countries,” she added.
On the other hand, US timber producers applauded the new tariffs on Canadian companies. Jason Brochu, the US Lumber Coalition co-chair, said the Commerce Department’s decision represents a move to create a level playing field in the industry.
“A level playing field is a critical element for continued investment and growth for U.S. lumber manufacturing to meet strong building demand to build more American homes,” Brochu said in a statement.
“More lumber being manufactured in America to meet domestic demand is a direct result of the trade enforcement, and we strongly urge the Administration to continue this enforcement,” he added.
Insider spoke with Stinson Dean, the founder of Deacon Lumber Company, about differing perspectives from experts regarding the newly proposed tariffs.
Dean said he doesn’t know how the new tariffs will impact prices, but said that last time a tariff increase was announced, prices skyrocketed, although from much a lower base.
However, Dean also said the “tariff should be judged on its merits and not a kneejerk reaction to the current market,” noting that scarcity of supply is the main issue when increasing tariffs, not pricing.
“In my mind, any tax on Canadian lumber incentivizes them to look sell to other markets. The US needs all the supply it can get-and buyers will clearly pay for it-but if it doesn’t exist, it brings construction to a halt. Scarcity is the problem, not price,” Dean said.
Dean recommended a “ceasefire” from tariffs for the next 12 months to give both sides time to lock in a long-term agreement because the industry needs “all the supply in the world pointed at the US.”
Lumber prices fell for an eighth straight day on Wednesday, deepening a roughly 30% pullback in the commodity.
Specifically, lumber futures fell roughly 5% to $1,201 per thousand board feet on the day.
Despite the pullback, lumber futures are still up 224% since May 19 of last year, and retailers like Home Depot have made it clear demand remains strong.
Home Depot’s chief financial officer Richard McPhail said in a Tuesday interview with Bloomberg that lumber sales are comparable to “a storm environment where literally as soon as you bring it in, it’s selling.”
“We’re really just focused on making sure we stay in stock and making sure we have the appropriate level of staff to serve our customers. The market will go where it goes,” McPhail added.
On Home Depot’s post-earnings conference call, Edward Decker, the executive vice president of merchandising, said the company had seen a “record-setting quarter for lumber prices.”
“At the end of the first quarter of last year, a sheet of 7/16 OSB [oriented strand board] was approximately $9.55. As we exited the first quarter this year, that same sheet of OSB more than quadrupled in price to $39.76,” Decker said.
Lumber prices have increased so much that CBS Denver reported thieves have taken to stealing the commodity from construction sites.
And KUTV Utah reported builders are looking for alternative materials to get around the rising costs of lumber, with some even turning to Bamboo.
US home construction also fell 9.5% in April, according to US Census Bureau data, as homebuilders struggled with rising commodity prices in lumber, copper, and steel.
Still, lumber prices are falling in the past week due to the end of a “de facto short squeeze” on the commodity, according to Stinson Dean, the owner of Deacon Lumber Company.
Brian Leonard, an analyst for RCM Alternatives in Chicago, also noted lumber futures are being driven down by “computerized trading and other platforms not related to the physical product, so it may end up going lower than the real market need to go,” per Bloomberg.
“The mills know there’s a lot more buying than needs to happen,” he added.
Lumber stocks like Weyerhauser and West Fraser Timber fell as much as 4.58% and 5.77%, respectively, on Wednesday in lock-step with declining lumber future prices.
Specifically, lumber futures fell to $1,327 per thousand board feet and are now down roughly 20% from May 7’s record high of more than $1,670.
Of course, despite the recent fall in prices, lumber futures are still up more than 85% year-to-date amid supply bottlenecks at mills and rising demand for home offices, renovations, and new homes.
Looking back a little further, lumber futures are up an incredible 283% over the last year alone.
Lumber’s rise has been so significant that NPR reported DIYers have begun to cut out the middlemen by creating their own sawmills to cut timber.
Typically, when demand increases, suppliers will increase the number of mills available to process timber. But Chad Hesters, a forest-product advisor and managing partner of the consulting firm Korn Ferry, told the Wall Street Journal that’s not an option for many suppliers these days because of how long it takes to create a modern mill and the significant capital investment involved.
“Trying to build capacity and make investments that have a lot of lead time at the top of a cycle is historically a good way to lose money,” Mr. Hesters said, per WSJ.
However, according to Stinson Dean, the owner of Deacon Lumber Company, there has been some reprieve for lumber pricing of late due to the end of a lumber short squeeze.
Dean told Bloomberg’s Joe Weisenthal and Tracy Alloway on the “Odd Lots” podcast at the end of April that lumber’s historic price run-up was a “de facto short squeeze.”
The squeeze was caused by commitments lumber yards made to homebuilders prior to a run-up in lumber prices and a tightening of the market, which forced them to buy at any price to meet obligations to customers.
Now, Dean says those conditions have abated, leading to some breathing room in the lumber market, according to a report from Bloomberg.
That’s good news considering Jerry Howard, the CEO of the National Home Builders Association, recently told NBC that if lumber prices continue to climb, “you will see the homebuilding sector slow down and grind to a halt.”
“This problem with lumber and other building material costs is sort of setting another potential perfect storm for housing to lead us into a recession,” Howard added.
It’s bad news for many aspiring homebuyers – but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.
Daryl Fairweather, chief economist at Redfin, told Insider it’s unfortunate the generation that suffered from the last housing crisis – entering the job force in the middle of a recession – is now facing a different kind of housing crisis. “Now that they have [somewhat] economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”
The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic itself. It comes at a time when millennials have reached peak age for first-time homeownership, according to CoreLogic, leading the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.
While CoreLogic says millennials are set to drive the housing sector for a long time to come, they won’t have an easy time of it if skyrocketing prices and tight inventory create new affordability challenges. Just as homeownership fell within their grasp, it’s slipping out of their fingers yet again.
Chief among the latter has been the price of homes. By 2018, millennials buying their first home were paying 39% more than boomers did at the same age nearly 40 years ago. The increasing cost of a down payment made it even more difficult for millennials, already struggling to build wealth, to save.
Then came the 2020 housing boom.
Millennials led all generations in homebuying last year, according to Apartment List’s Homeownership report, accelerating a five-year trend in millennial homeownership rates rising the fastest. The millennial homeownership rate climbed to 47.9% from 40% just three years ago, per the report. The Jefferies note also highlighted that homeownership rates have increased among those ages 25 to 29 and especially accelerated for those ages 30 to 34. The same note also noted the underbuilding of homes dating back to the Great Recession.
“We’ve been underbuilding for years,” Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US has been around 6.5 million homes short since 2000 and is currently facing a two-month supply of homes that should look more like a six-month supply.
There have been 20 times fewer homes built in the last decade than in any decade as far back as the 1960s, according to Fairweather. She added that’s not enough homes for millennials, who are the biggest generation, to buy.
The pandemic and a lumber shortage worsened the situation
Further driving the housing scarcity is the pandemic itself. Some owners aren’t listing their homes as a safety precaution, Cororaton said. Others are wary of putting them on the market for fear of being unable to find an affordable replacement to buy.
Cororaton said there might have been more homes on the market absent a historic lumber shortage. Lumber factories shut down almost immediately last March due to safety restrictions. When the housing market opened up, Americans bought more new houses than the lumber industry could keep up with. As demand spiked, lumber prices jumped by almost 200% since April 2020. It led to an average unexpected price increase of $24,000 for new homes in the past year, per NAR, one aspect of a nationwide record-high rise in housing prices.
Home prices have been shooting up for years, at a steeper rate than they did ahead of the Great Recession. But the national median home-sale price hit a new high of $353,000, per Redfin. Housing prices are up 18% year-over-year, Fairweather said: “I don’t see values going down at any point.”
The shrinking housing inventory further inflamed a market already hot with demand, sparking cutthroat competition. The typical house is getting snatched up in less than a month as aspiring homebuyers find themselves in bidding wars, putting in all-cash offers, and offering higher down payments.
Cash sales have increased from 18% to 23% in the past year, and first-time home buyers are more likely to put down a full 20% down payment than they were last year, according to NAR. “Because the market is so tight, you want to sweep in and make your offer more attractive,” Cororaton said, adding that a 20% down payment is more appealing to the seller because it signifies financial capability.
Every home sold in March saw nearly five offers on average, compared to two offers in 2019 and 2020 at the same time. Seeing some houses with multiple offers, some buyers on tight budgets aren’t even bothering to jump into the bidding war.
Losing an avenue for building wealth
A heated market running low on homes and high on competitive demand has ultimately set a new pricing precedent that is pushing homeownership further away for many first-time buyers. Although the wealthier cohort of the millennials may be better positioned to buy a home, even those who successfully managed to scrape together some savings are facing dwindling chances of homeownership.
Owning a home is a traditional way of building wealth through equity, but the increasing cost of such an investment is eliminating such an opportunity for many. This is particularly troubling for millennials, some of whom already have less wealth than past generations at their age. Losing housing as a wealth avenue could further widen the generational wealth gap between them and boomers, adding to the vicious cycle of millennial economic woes.
“The bottom line is, [homeownership is] going to be more difficult for millennials,” Cororaton said, adding that some of them are still dealing with debt.
Contractors need to ramp up new builds if they want to satisfy growing millennial demand, per Jefferies – as many as 1.7 million to 2 million new homes per year, maybe even more to fully repair the imbalance. Housing starts rose to 1.7 million in March, but Cororaton said building new homes is also the beginning of addressing the housing issue.
New-construction homes can be expensive for buyers. While an increase in supply would relieve pressure on prices, she said, down-payment assistance would be helpful. And when more homes are built, she added, we should allow for higher density housing, which would mean changing zoning laws and regulations. But as she put it, “that’s easier said than done.”
While builders are doing everything they can to build so they can take advantage of a hot housing market, Fairweather said, challenges like the lumber shortage, a lack of skilled labor, and shipping shortages – affects the appliances that going into a home – aren’t helping.
“All the shortages right now are definitely not helping us figure our way out of the hole, but even without those challenges, the hole is humongous,” Fairweather said. “So it’s going to take decades of building lots and lots of homes.”
Lumber has staged an incredible rally in the last year and is taking exchange-traded funds that track the commodity along for the ride.
The iShares Global Timber & Forestry ETF (WOOD) has climbed 89% in the last 12 months and now sits at a record high. The fund tracks global timber and forestry stocks and gained nearly 7% in premarket trading Tuesday but pulled back at the open. Bloomberg first reported on the funds record performance.
Meanwhile, the triple-leveraged Direxion Daily Homebuilders & Supplies Bull 3X Shares fund (NAIL) has surged roughly 100% year-to-date and is the second-best performing U.S. equity fund this year, according to Bloomberg data. NAIL seeks daily investment results of 300% of the performance of the Dow Jones US Select Home Construction Index.
Spot lumber prices hit a record high of $1,326 per 1,000 board feet on Monday, bringing the commodity’s 12-month gain to 231%. Soaring lumber prices are a sign of the pandemic-induced housing boom, fueled by record low mortgage rates and an exodus to the suburbs.
Piper Sandler’s Craig W. Johnson, CFA, CMT said he believes Lumber prices could “very easily” move above $1,300 per thousand board feet this year even after notching a record high in April.
That figure represents a 12% increase from Tuesday’s closing price of $1,154 per thousand board feet. Lumber prices have soared more than 250% in the past year alone.
In an interview with Insider, Johnson, a technical research market strategist, said that lumber prices have broken out of a “huge consolidation” that occurred from 2018 through 2020 and are set to soar amid the economic reopening.
Based on technical analysis, Johnson sees lumber prices continuing to rise to at least $1,300 over the next six to nine months.
The strategist noted that there is an enormous demand for housing and renovations that’s pushing lumber prices higher.
Johnson said that with interest rates as low as they are, there’s an overall sense that this is the lowest mortgage rate many people are ever going to get.
Johnson also said that timber companies are struggling to catch up with demand after shutting down some of their operations during the pandemic.
The technical research strategist added that, based on what he’s been reading, timber companies won’t be putting more sawmills in place to meet demand either because they lack the economic incentive to add capacity.
Creating more sawmills is a capital-intensive process that requires producers to get permits, and that can’t be done quickly.
Johnson also said the upcoming hurricane season could exacerbate the lumber price issue by adding to demand.
When asked what could stall rising lumber prices, Johnson said that only the slowing of economic activity would cause prices to fall, but noted that right now he believes that’s unlikely as we are in the “great wide open” for economic growth post-pandemic.
Lumber traded up 2.7%, at roughly $1,212, as of 12:04 p.m. ET on Wednesday.
While the pandemic hit the US, everyone seemed to want their own house. With mortgage rates at record lows and no need to commute to work in cities for at least 2020, prices soared everywhere. But they’re also soaring because there isn’t enough wood out there: lumber, to be exact.
Now it’s clear how much the lumber shortage is adding to the skyrocketing price of new homes: a whopping $24,000.
That stat is courtesy of the National Association of Home Builders (NAHB), which found the price of an average family home increased by $24,386 since April, with the market value of a multifamily home increasing by $8,998 over the same time period.
A report from the NAHB in February said the lumber supply chain impact came as factories shut down almost immediately last March for safety reasons, and then as demand spiked, supply couldn’t keep up. Lumber prices have jumped by almost 200% since April 2020.
“The elevated price of lumber is adding approximately $24,000 to the price of a new home,” NAHB Chairman Chuck Fowke told real estate news site HousingWire. “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”
Zillow’s Producer Price Index found that February’s 2.8% annual increase in sales was the strongest it had been since October 2018, meaning that while more houses are being sold, supply for building materials, like lumber, remain low and costly.
On March 12, the NAHB, along with more than 35 other housing organizations, wrote a letter to Commerce Secretary Gina Raimondo asking her to examine the lumber supply chain and look into solutions for the high costs.
“Housing and construction can do their parts to create jobs, boost the economy to its pre-pandemic strength, and provide safe and affordable housing for all Americans, but in order to do so the federal government needs to address skyrocketing lumber prices and chronic shortages,” the letter said.
Building 1,000 average single-family homes creates 2,900 full-time jobs and generates $110.96 million in taxes and fees, the letter said, emphasizing the economic benefits the government would reap in finding solutions to the expensive building materials.
Fowke told HousingWire that the continued rollout of COVID-19 vaccines will help decrease the costs of lumber since more mills will be able to safely reopen, and with more homes being built, home builder confidence should rise. (Homebuilder confidence fell by two points in March.)
The timeline on when material prices will decline is yet to be determined, but prices might start to come down with President Joe Biden on Monday promising 100 million COVID-19 shots in the next 10 days.
“Shots in arms and money in pockets – that’s important,” Biden said.