Lumber Prices Retreat as Supply Expands

Lumber prices have retreated from last month's record high as sawmills ramp up production, signaling the dizzying pace of new-home price gains could slow.

Lumber futures dropped 18% last week in trading on the Chicago Mercantile Exchange, the biggest decline in records going back to 1986, according to Bloomberg. That’s down about 40% from the record high reached on May 10.

“The lumber futures market is down considerably,” said Robert Dietz, chief economist of the National Association of Home Builders, said in an interview with Mortgage Research Center. “That’s good, but some of the declines we’ve seen in pricing is because some of the demand for lumber has pulled back.”

Builders broke ground on 1.09 million homes at an annualized and seasonally adjusted rate in April, a drop of 13% from the prior month, according to Commerce Department data. The pull-back wasn’t because people didn’t want new homes, said Dietz.

“The demand is there – we know the buyer interest is there – but we’re seeing a challenging environment for builders who are finding it harder and more expensive to find materials and labor,” Dietz said.

The median price of a new house in April was $372,400, a gain of 20% from a year earlier, the Commerce Department said. In the same period, the costs for materials used to build a house increased about 19%, Dietz said.

“Lumber is just the canary in the coal mine,” Dietz said. “We’re dealing with fairly significant supply-chain disruptions right now, because of the pandemic.”

Many of the sawmills that shut down at the beginning of the pandemic have reopened, despite labor shortages, Dietz said.

U.S. lumber production has increased 5% over the past 12 months, with another increase of 5%, or roughly 1 billion board feet, predicted for the next year, according to an estimate by Domain Timber Advisors in the Bloomberg story.

While supply is up and prices have retreated from record highs, don’t expect to see it translate into cheaper prices at Home Depot this month, said Dietz.

“A drop in the futures markets doesn’t always translate into a reduction for retail pricing right away,” he said.

Lumber prices are expected to remain above historical norms for at least a year or two, according to Mark Wilde, an analyst with BMO Capital Markets.

“‘Nosebleed’ prices won’t last, but strong demand, a limited supply response and a rising cost curve all point to above-trend prices for at least the next 12-24 months,” Wilde said in a note to clients cited by Bloomberg.