Something had to give—the high prices of houses or the lumber that goes into building them.
For now, it appears it will be the wood, as home builders pulled back sharply on construction in April in a bid to avoid loading up on lumber which has rallied more than 300% this year.
The move, coming despite relentless demand from home buyers, triggered a third straight day of losses in lumber that proved to be the market’s worst in eight months.
At Tuesday’s settlement, US lumber futures for July delivery per board footage settled at $1,264 per board foot, down almost 5% on the day.
The slump followed data from the Commerce Department that showed US housing starts down almost 10% in April due to a pullback in activity from builders probably reacting to soaring prices of most materials, including lumber.
Even prior to Tuesday, lumber prices had been falling, giving back 15% on Monday and nearly 4% on Friday.
Combined, the drop of $366, or nearly 23%, over the three days since Thursday’s last positive close of $1,630 marked the sharpest loss for lumber since the Sept. 15-17 period.
During those three days, the market lost $387, or 42%. At that time though, lumber was trading below $1,000 per ft board. This year alone, it has traded as high as $1,711, weighing considerably on the bottom line of builders.
Industry experts have been warning that there’s a limit to the rise in materials prices that builders can take, or the floor might just cave.
Is This The Start Of A More Meaningful Correction In Lumber?
What we have seen over the past three trading sessions in US lumber may just be the start of a more meaningful correction, according to Paul Jannke, a timber markets specialist at Forest Economic Advisors who predicted the slump in an April blog on Pro Sales, a housing industry portal.
Despite the red-hot market for housing now, the North American timber industry's latent production capacity "far outstrips any rise in the level of demand for the next few years" for homes, Jannke said in that blog.
Jannke, who has spent 15 years studying timber markets, said the rally in lumber over the past year was driven by three factors: rise in consumption, low inventories at dealers and wet weather that slowed log harvesting and shipping logistics—all “short-term phenomena.”
While he agreed that the rise in consumption has boosted demand for lumber, what was more important, he said, were the extreme low levels that building material dealers and suppliers have been carrying lately.
Those parties reduced their stocks by roughly 4 billion board feet, he said, so just replenishing their stocks in anticipation of the spring building season would have caused an upsurge in calls to mills.
In addition, wet weather in the US South, and the usual fallow period that comes with the North's spring thaw, meant that timber companies couldn't go into the woods when demand began to rise, he said.
But now the timberlands are drying out, so that factor will evaporate, and buying this summer will be done with an eye toward construction projects starting around September, when construction activity begins to taper, Jannke said.
Adding to these factors is the tremendous latent capacity in the industry. Jannke noted that mills that ran two to three shifts per day during the housing construction boom are down to just one shift a day, if they're open at all. It takes months to open a mothballed mill, he said, and six months to open a mill that was totally shut.
At the same time, reduced consumption from builders has meant harvests trail the growth rates on North American timberlands. In fact, Jannke noted, nearly a full year's worth of harvest will be deferred between 2008 and 2012.
"The fiber's available," he said. "That's another factor why prices in 2011 are likely to be...within a 5% range of where we are this year."
In the blog that ran last month, Jannke predicted that "in May, perhaps June, we're going to see prices come off, and come off fairly sharply.”
Housing Starts Tell The Story Of Builder Hesitation
That it’s happening exactly as he said shouldn’t surprise anyone who’s been paying attention to the details in the monthly housing starts put out by the Commerce Department.
The department said on Tuesday that the number of houses authorized for construction, but which have not yet started construction, are at the highest levels since 1999, suggesting hesitancy on the part of builders.
Mike Fratantoni, chief economist at the Mortgage Bankers Association in Washington, commenting on the data, said builders were undoubtedly delaying starting new construction because of the marked increase in costs for lumber and other inputs.
Added Fratantoni, in a quote carried by Reuters:
"These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fueled by an improving job market and low mortgage rates."
The housing market—the epitome of the so-called American Dream—is one of the pillars of the US economy, accounting for nearly 15 percent of Gross Domestic Product.
Housing has been the star performer in the economy's recovery from the COVID-19 recession, which started in February 2020. Residential construction investment has enjoyed double-digit growth since the third quarter of last year.
A US lumber shortage has caused prices to more than triple within the last year and add thousands to the overall costs of new home construction in the country.
In just one year, the price of lumber has increased about 370%—reaching a record high above $1,700 per 1,000 bd ft. For context, lumber has historically fluctuated between $200 to $400.
Across the United States, the average price for a single home shot up by $35,872, according to an analysis conducted last week by the National Association of Home Builders.
In a recent survey in Nevada published by the Las Vegas Review-Journal, new single-family homes, on average, can cost $25,000 more, and for larger homes, the lumber shortage could cost upward of $50,000 to $60,000 more.
Despite the slump in lumber futures over the past three days, physical prices of lumber have not moved to the downside.
According to the latest analysis by Random Lengths, the industry’s tracking firm, the price of framing lumber was at $1,327 per thousand board feet on Tuesday—up from $1,200 on Apr. 23.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.