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The pandemic saw many unique shifts in consumer spending habits as people were stuck at home and looking for things to do. Many individuals turned to unfinished DIY projects around the house as something to occupy themselves. The real estate market also started to heat up since interest rates were low and people looked to relocate as many jobs went remote.
As a result of this increased demand for home improvement and real estate, the price of lumber went up. The lumber industry misread the original pandemic demand and wasn’t ready for the boom. Instead of increasing production during lockdowns, many companies in the lumber industry slowed down and even took some downtime. This led to supply chain issues as folks couldn’t get lumber quick enough when they were ready to begin those DIY projects.
Let’s take a look at lumber prices during the pandemic and now, as well as which industries have been the most influenced by the fluctuating cost of this commodity during a confusing two-year period.
If you look at the chart for the price of lumber, you’ll see that this commodity is plummeting from its record highs just one year ago.
What exactly has happened to the price of lumber?
The price of lumber has had some wild fluctuations since the start of the pandemic in 2020. At first, the lumber industry misread the economic situation by slowing down production. They weren’t prepared for the boom in house sales and home renovations. The DIY industry saw people spending their time working on projects around the house since they couldn’t spend money on going out or traveling for the time being. This meant that discretionary spending shifted towards home improvement retailers.
The industry experienced a unique situation with regard to supply and demand. Between supply chain issues caused by the pandemic, labor shortages, and increased consumer demand, the price of lumber skyrocketed in 2021. The price of lumber reached $1,515 per thousand board feet in the spring of 2021. This was a huge increase for lumber buyers who were used to paying anywhere from $350 to $500 before the pandemic.
With interest rates going up, the real estate market is cooling off from it’s pandemic highs. New home builds have slowed down as homes newly under construction dropped 9.6% in July. Since lumber is used mainly for framing and finishing (walls, floors, panels, and window frames), the commodity isn’t needed when real estate construction cools down.
Consumers went from working on projects around the house to spending more money on going out and entertainment as pandemic restrictions loosed around the country. Folks are spending less of their discretionary money on home improvement as life returns to normal. This leads to a natural decrease in the demand for lumber.
As of closing on September 14th, the lumber price was $511 per thousand board feet, down $56 from the previous day’s close. To put things into perspective, the price of lumber reached an all-time high in May of 2021 at over $1,700. The price of lumber has dropped about 54% since the beginning of the year.
Lumber prices are directly tied to the news of interest rate hikes and an economic slowdown. As frustrating inflation news hits the media, we’ve seen stock market drops and a decrease in consumer confidence.
A strike by the railroad workers would have also increased the volatility of the price of lumber as this commodity relies on freight train transportation. This possible strike would have been the first significant railroad strike in 30 years, and it would cause severe supply chain disruptions for the lumber industry, which would hurt the price. In positive news, it appears that a potential strike has been averted with a tentative deal. We have to watch how the negotiations play out.
Lumber prices impact many industries, both directly and indirectly, since this commodity is used for various reasons.
Here are the industries that are most impacted by lumber prices.
The housing market relies on this key building material to build new homes. When lumber prices went up, construction companies charged more for every project. This increase in prices (along with increased interest rates on mortgages) sent the demand for newly built homes downward. In disappointing news, housing starts, (or homes newly under construction), plunged 9.6% in July 2022 alone. The lackluster numbers for new home builds coincides with the new decrease in lumber prices.
Mortgage rates are strongly tied to all other costs related to housing expenses. Data from the Mortgage Bankers Association stated that the interest rate on a 30-year fixed mortgage increased to 6.01% for the week that ended on September 9, 2022. This is an increase of 7 basis points from one week prior. This rate hike instantly led to a sharp decrease in the price of lumber since fewer people are applying for mortgages on new builds or for mortgage refinancing to work on home improvement projects.
High-cost mills have to balance the declines in lumber demand with production. So when lumber prices fluctuate, sawmills naturally feel it since they have to try to keep up with market demand. When the pandemic started, labor shortages and supply chain issues affected the distribution of lumber. Since you can’t just throw up an extra commercial sawmill on short notice when more orders come in, the increased demand can cause a literal logjam.
As construction projects shot up and the supply and processing of lumber couldn’t keep up with the shocking demand, lumber prices went up, which spurred an increase in sawmill production. Sawmills attempted to cash in on the higher prices by ramping up production to increase profits, but this only led to a decrease in prices of lumber since the demand wasn’t there any longer.
The prices of lumber are now dropping due to lower demand, so sawmills have to plan accordingly moving forward.
Lumber is somewhat versatile in that it can be transported through various methods, from truck to rail. When the price of lumber fluctuates, the transportation industry feels it. There were times in the last few years when transportation couldn’t keep up with the demand. As demand decreases, this will mean less work in freight and transportation. The jury is still out on whether this is a return to normal or a true economic slowdown. We have to see how the economy reacts to continued rate hikes.
Retailers like Lowes and Home Depot feel the impact when it comes to lumber prices since they rely on consumers engaging in DIY home improvement projects. With high interest rates and a decrease in discretionary spending, fewer people are looking to purchase lumber. As the price of lumber goes down, this will mean less revenue for the retailers.
When the cost of borrowing money goes up to slow down inflation, lumber is a commodity that will be negatively impacted. Industries that are tied to lumber suffer together when demand slumps. When the housing market cools, there are fewer new homes built, and fewer people engage in home improvement and repair projects. Someone wanting to purchase a fixer-upper home may not be as inclined to do so when interest rates are soaring. A property that may have seemed like a worthwhile investment last year, isn’t as attractive with higher interest rates and a larger monthly mortgage payment.
As you can imagine, folks are also less inclined to borrow money to do home renovations when interest rates are rising. Homeowners often dip into their home’s equity by refinancing their mortgage or taking a home equity loan to access money to work on home renovations. This isn’t as common a practice when mortgage rates are through the roof, as homeowners will second-guess the idea of adding that deck or finally finishing the basement when interest rates are high.
Lumber prices saw extreme swings over the last few years as demand drastically rose and fell. Some experts predict that volatility for lumber prices should subside as we return to a normal market. Others fear an impending housing market recession could greatly hurt the demand for lumber and other related products.
The real estate market influences many stocks, so if you’re working on your investment portfolio, pay attention to your exposure to the housing market as the economy cools down. If you decide not to invest in physical real estate due to high interest rates, you still have other options. Q.ai offers Investment Kits with REITs and other real estate positions built in. If you are worried about market volatility, you can activate Portfolio Protection to protect your gains and reduce your losses, no matter what industry you invest in.
The price of lumber is worth the time and attention it takes to monitor, as it’s strongly connected with the real estate market. The labor market suffers when the economy slows down, leading to less consumer spending on discretionary items like home improvement projects. As the Fed continues to raise interest rates to combat inflation, how the housing market reacts will be noteworthy.
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