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Are lumber prices falling and how low will they go?

by Corben Grant on 02 Sep 2022

Over the last two years, lumber prices have been just as unpredictable as most other facets of life. Even last October when we reported on the decline in lumber prices, we could not have predicted yet another peak that occurred since, and again another decline.

The price of lumber is an interesting indicator in real estate, as it is a massive component in the cost of building new homes, and thus can play a big role in home prices. However, the relationship between home prices and lumber prices is not exactly one-to-one, and these two factors interact with each other in complex ways.

In this article, we will explore the current commodity prices for lumber, examine their movements, and try to explain what they may mean for real estate markets in Canada.

Lumber prices experienced huge swings over the last two years

The price of lumber became a pretty hot topic in early 2020 as much of the world was adjusting to the newly emerging pandemic conditions. Millions of people were forced to stay home and find ways to spend time, and one popular option was to take up home renovations and DIY projects.

The result was more people than ever on the market for lumber, causing demand to skyrocket At the same time, supply chain interruptions made it harder for lumber producers to keep up with their output. The outcome was that lumber prices exploded over the course of just a year.

At the start of 2020, lumber prices, commonly measured in US dollars per thousand board feet, were about US$400 per thousand board feet. By May of 2021, the price of lumber had increased to nearly US$1700 per thousand board feet. That's an increase of over 300%. At this time besides the incredibly high prices, it was also incredibly hard to even find wood to buy, and many found their home improvement plans to be not as simple as they imagined.

This run-up in lumber mirrored a similar large runup in home prices over the same period. Naturally, lumber is a primary component in new home builds in Canada, so an increase in lumber also greatly raised the cost of construction. Along with huge activity in the resale market, builders during this time were also racing to construct more homes to meet demand, causing lumber prices to increase further.

However, while home prices continued to climb for the next two years, the commodity price of lumber fluctuated much more dramatically. Both on the way up and the way back down from the lumber price peak saw a number of smaller monthly peaks. However, once things did begin to turn around, prices began to fall even faster than they rose following the peak of May 2021. Finally, a second, lower peak occurred in march of 2022, and prices have been trending downwards since.

Why have lumber prices declined now?

Currently, the price of lumber has been trending downwards since its previous peak. Nonetheless, lumber prices still remain above where they were in 2019, before volatility in prices.

The causes for lumber prices coming down are in a large part a reversal of what caused them to increase. Fewer people are taking up renovation projects, in part due to now having many more options of how they would like to spend their disposable income, and in part due to high inflation and interest rates eating reducing the average homeowner's disposable income to begin with.

At the same time, lumber production has been able to catch up to demand, causing prices to stabilize. For now, lumber is significantly more affordable than it was for most of the last two years, and stock is readily available.

Will prices rise again or remain lower?

The question now is whether or not the cycle of rising and falling prices is over, or if we have yet another spike in our future. While commodity prices fluctuate all the time, it seems that in the near future prices will remain far more stable. This is due in large part to the waning pandemic, and supply chain issues being largely cleared up.

Estimates would see the price of lumber fluctuating around its current price in the range of US$400 to US$600 per thousand board feet.

Simultaneously we still rely on lumber for the large majority of building projects and despite increasing interest rates home builders are still moving forward with a high number of housing starts. This alone should create a steady enough demand to prevent any kind of price collapse.

For those who put off renovations during the runup of the lumber bubble, you may now find much more accessible prices. On the other hand, those waiting for much lower prices may not want to hold their breath.

Supply and demand factors in lumber prices

As with most commodities, the price of lumber is primarily driven by principles of supply and demand. When supply is plentiful and demand is low, lumber mills are encouraged to reduce prices to encourage buying. When supply is low and lumber demand is high, lumber mills can charge more. Often when supply is constrained by market-wide factors, such as the closure of businesses or staff shortages, lumber mills must also raise prices to make up for lost profits.

As far as where lumber demand comes from, there are a number of sources, but the largest would be in the construction industry, and second to that would be consumers.

Industrial buyers often track lumber prices in what are called futures. Because of the long period of preparation before construction can begin, as well as the time it takes to produce, process, and deliver lumber, industrial groups pay prices of lumber to be delivered at a future date. What this means for consumers is that suppliers often have stock that was purchased at a higher price than the current market price, and they will ideally try to sell this stock off at a higher price before they can lower their rates. The result is that the consumer price of lumber will often lag the commodity prices by up to a month or more.

How does lumber affect real estate?

The lumber and real estate markets are linked, though the connection is not one-to-one. Demand for new housing will naturally increase demand for lumber which can raise prices, while on the other hand, the price of lumber will increase the cost of new homes.

What we are seeing now is a fall in home prices and a similar fall in lumber prices, though these are likely due more to an improving supply chain and rising interest rates than direct effects on one another.

There are many other ways that lumber markets can affect housing. For example, when demand is too high, lumber producers may be more likely to sell sub-par products to satiate buyers. This can lead to difficulty in construction, or even lost costs from unusable materials.

Another aspect that may be particularly important now is the effect of home renovations on overall property values. With lumber prices low and homes selling for less, sellers and builders may be more willing to conduct value-adding improvements to make their homes more appealing.

The bottom line

In all the years that humans have been building homes, we have yet to find a much better material than wood. The result is, that we are still very much at the whim of the lumber market when it comes to things like home renovation and new home builds.

Luckily, it seems that the most likely future for the lumber market contains far more stability than in recent years, which will mean good things for those planning on building a home or conducting home renovations.

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