Lumber Prices Crash Amid Elevated Home Prices

Workers sort softwood in a workshop in Madawaska, Ont., on April 25, 2017. (The Canadian Press/Sean Kilpatrick)

Lumber prices have drastically fallen this year as the industry grapples with the consequences of high home prices.

Lumber is trading at $608.6 per thousand board feet as of June 1, which is over 54 percent below the Jan. 13 peak of $1,329. Kevin Mason, managing director of ERA Forest Products Research, believes that lumber markets are “probing for a floor,” according to Bloomberg.

He estimates prices to soon fall to $400 per thousand board feet over the next two months, after which producers will likely restrict production to flush out excess supply.

Buyers have slowed down their lumber orders and sawmills have started cutting down their prices due to inventory buildup, according to a weekly price bulletin from Random Lengths. “Triple-digit discounts became the rule rather than the exception,” the service said in the bulletin, the Wall Street Journal reported.

In an April survey of building products dealers, only 12 percent said that their lumber and wood panel inventories were slightly low to very tight, according to John Burns Real Estate Consulting. This is down from 61 percent from the same time last year.

Canfor, one of the world’s largest lumber producers, recently announced that it would extend a drawdown in its production schedules as the firm deals with a supply glut.

“The global supply chain crisis has had a significant impact [on] Canfor and Canfor Pulp in recent quarters. This has resulted in operational downtime with our sawmills in Western Canada currently running on a reduced schedule to manage excess inventories at our mills,” Canfor CEO Don Kayne said in the company’s earnings call last week.

Fears of a softening housing market are affecting the lumber market, with home prices at elevated levels and mortgage applications on the decline.

Based on data from the Mortgage Bankers Association (MBA), mortgage loan application volume fell by 2.3 percent on a seasonally adjusted basis for the week of May 27 compared to the week prior. The unadjusted Purchase index declined by 2 percent from the previous week and 14 percent when compared to the same time last year.

“Mortgage rates fell for the fourth time in five weeks, as concerns of weaker economic growth and the recent stock market sell-off drove Treasury yields lower,” said Joel Kan, the MBA’s associate vice president of Economic and Industry Forecasting.

“Mortgage applications decreased to the lowest level since December 2018, as the purchase market continues to struggle with supply and affordability challenges.”

The average interest rate for 30-year fixed-rate mortgages has climbed two percentage points in just five months according to the Federal Reserve Bank of St. Louis. While a year ago, 25 percent of new home sales were priced below $300,000, that number has now fallen to just 10 percent.

As the housing market softens, the demand and price of lumber will also be affected. “It is our belief that we are past peak demand, and this commodity bull wave is over,” Kyle Little, the chief operating officer at Sherwood Lumber, told Fortune via email. “It is now moving to its next cycle.”