Interest rates help displace demand, so prices fall.
Look at six months of lumber futures and, if you depend on the material in your business, things look downright promising. At $555.9 per thousand board feet, it’s almost like a beneficent construction deity is blessing you with fairer weather and the ability to buy a 2×4 without needing a mortgage.
But look at the five-year view and, while better than recent pricing, the current futures are still $100 to $200 more than they were before all pandemic hell came loose. That may be the future: prices higher than it used to be in the good old days, but lower than just a few weeks ago.
“I believe we are seeing a cause and effect to higher inflation indicators—including rising mortgage rates,” Mickey chief operating officer Alex Meyers tells GlobeSt.com. He thinks that some rough times now and ahead may create conditions more favorable to virtually everyone in CRE.
“Single family home construction/remodeling project lead times are still lengthy due to the existing backlog of orders, skilled labor shortages and ongoing logistics disruptions, coupled with record fuel prices,” he adds. “These factors will price some participants out of the market, allowing for future price corrections and lumber producers to work through an existing backlog of orders while home buyers are less confident to pull the trigger on future projects as economic volatility looms on the horizon.”
In other words, “The big picture here is that interest rates have risen, and they will reduce the number of new home buyers,” MaterialsXchange CEO Mike Wisnefski tells GlobeSt.com. “At the start of the year the whole industry was very optimistic about the amount of business coming in 2022 and concerned about building materials pricing going higher so they built large on ground inventories of materials. As the overall industry builds an inventory, ‘apparent demand’ is strong, and prices do indeed go higher.”
But when the demand slows, as higher interest rates and costs of projects do, the built-up inventories get drawn down, that apparent demand falls, and prices move lower.
Will they keep dropping? “We believe that they will trade above long-term averages for the balance of the year,” Josh Goodman, vice president of inventory and purchasing at Sherwood Lumber, told GlobeSt.com earlier this month. “However, in the short term, lumber is down more than 50% from the most recent peak. The market is trying to determine where the new price equilibrium is compared to slowing demand and increased supply.”