Lumber prices will fall back to pre-pandemic levels within a year amid considerable volatility, investment chief says

Worker loading lumber
  • The price of lumber futures has fallen to its lowest level since November 2020, erasing this year’s dizzying gains.
  • An investment chief says the price of the commodity could reach its pre-pandemic level in the next 12 months.
  • He added, however, that the price trends will vary by geography.
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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 Robert 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 price 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.

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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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The price of a plywood substitute that used to be cheap is hitting repeated record highs even as lumber’s rally cools

TORZHOK, TVER REGION, RUSSIA - FEBRUARY 10, 2017: Inside the Talion Arbor high-technology timber plant launched as the Torzhok branch of STOD LLC.
  • The price of a formerly cheap plywood substitute called oriented strand board has surged 97% since the start of the year.
  • The rally in OSB is due in part to the storm in Texas, which caused a shortage in a substance needed to make the board.
  • OSB has continuously hit record highs in recent weeks even as the price of lumber has cooled.
  • See more stories on Insider’s business page.

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.

Experts said the surge was unexpected. The industry, for that reason, struggled to catch up.

“You don’t just start up a mill at the snap of a finger,” Drew Horter, president and CIO of Tactical Fund Advisors told Insider. “This is a supply chain problem.”

OSB’s continued rally to new heights comes at a time when lumber prices are cooling after an epic 400% rally over 12 months.

“It’s even more difficult to get OSB at the moment than it is lumber,” David Flitman, CEO at Builders FirstSource, told Bloomberg TV on Wednesday.

Read more: Bank of America says to buy these 31 small- and mid-cap stocks with average implied upside of nearly 30%, as they represent its best ideas for the 2nd half of 2021

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