Homebuilders are not out of the woods just yet despite lumber prices plunging off historic highs and into negative territory for the year.
Random length lumber futures traded at CME Group on Tuesday fell as much as 2.67% to $667 per thousand board feet. With the decline, they were down 60% from their all-time high of $1,686 on May 7 and 24% this year. The price drop came during what is typically a seasonally weak demand period for lumber as most orders have already been filled.
“While the recent drop in lumber prices is a positive development, the lumber crisis is far from over,” said Jerry Howard, CEO of the National Association of Home Builders.
Lumber prices had soared by as much as 316% from the start of 2020 as the COVID-19 pandemic caused supply chain bottlenecks and resulted in strong demand for building projects, including both home improvement and construction, as the ability to work from home led to the need for bigger houses.
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But Howard said most builders have been unable to take advantage of the lower prices as producers are still selling lumber that was purchased when prices were at record highs. Additionally, sawmill output continues to lag demand.
The high price for lumber has added as much as $36,000 to the cost of building a new home, pushing prices beyond the reach of some buyers, which has weighed on home builder confidence.
The NAHB/Wells Fargo Housing Market Index last month fell to 81, its lowest since August 2020. Above 80 the index still signals strong demand in a housing market that is short of inventory.
The housing market, which accounts for about 15% of economic activity, is a key barometer of the U.S. economy.
Federal Reserve Chairman Jerome Powell has used what is going on in the lumber market as an example of why the recent surge in inflation will be temporary.
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“For example, the experience with lumber prices … the thought is that prices like that that have moved up really quickly, because of shortages and bottlenecks and the like, they should stop going up and in some point, in some cases, they should actually go down,” Powell said during the Q&A session following the Fed’s latest policy decision.
But Keta Kosman, publisher of Vancouver-based Madison’s Lumber Reporter, warns that lumber has been underpriced for 10 years and that prices are never going back to levels seen early on in the pandemic.
“There are too many supply constraints and a very, very robust demographic for U.S. homebuying,” she told FOX Business.
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NAHB’s Howard also worries about a prolonged bout of higher prices.
“If supply does not increase fast enough to meet demand, we may find ourselves in the same situation as last November, when lumber prices posted a similar steep reduction only to reverse course and move to record-high levels,” he said.