Could lumber prices fall even further?

The cost of the commodity has plummeted from the highs of last year

Could lumber prices fall even further?

Surging construction costs, supply chain snarls and unprecedented demand led to something of a wild ride for lumber prices at the height of the COVID-19 pandemic.

In April last year, the price per thousand board feet of lumber rocketed to almost $1,200 (USD), an increase of more than 250% since the same time in 2020. By the following month, prices were sitting near $1,700.

They’ve since plummeted – hitting a low of $550 before rebounding slightly to their current level of $630. That figure marks a substantial decline over the highs of last year, but still means lumber is currently priced well above historical averages, according to Vancouver-based wood market consultant Russ Taylor (pictured top).

He told Canadian Mortgage Professional that prices were around 50% above what would traditionally be considered a good market, although inflation, rising interest rates and cooler demand in the DIY market mean they’re likely to decline imminently.

“The housing market and the DIY sector, that’s 70% of lumber consumption,” he said. “So when they’re both cooling, it’s going to put downward pressure on demand and prices. That’s the negative effect for the third quarter that we’re going to be watching.”

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The recent rebound arrived as mortgage rates in the United States fell at the end of the June, as the 30-year fixed mortgage rate hit 5.7% last week – an 11-basis-point decrease.

Some of the challenges associated with the pandemic appear to be easing, with more mills now able to operate, produce lumber and bring supply into the market. Still, that’s coincided with a time when demand is easing and logistics are improving gradually.

While the supply problem in the market is easing, inventory is still “quite low,” meaning that those who need to buy at present are propping up lumber prices to some degree. However, that situation will probably end before the season is out, according to Taylor, as some construction pauses due to summer breaks or hot weather.

“Unlike the first half of the year where it was too much demand and not enough supply, now it’s going to be too much supply, not enough demand,” he explained. “My expectation is we’re going to see some further price reductions into the third quarter – but probably not for a little while.”

It’s been a difficult and unpredictable couple of years for those Canadians who had planned to start construction on a project, with the seesawing cost of lumber making it nigh-on impossible to get an accurate gauge of where prices are headed. Still, as prices start to decline one of the key questions will be where they end up. Could there be a repeat of the dramatic nosedive since last year?

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Not quite, Taylor said. He expects prices to correct by another 25% to 35% to somewhere in the low-to-mid-$500s – although that would still keep them well above historical and pre-pandemic levels.

Recent changes to the way British Columbia’s government calculates how it charges for its lumber could put the BC market at something of a disadvantage compared with US competitors who don’t use the same formula, he added.

Of course, despite those forecasts for lumber price drops, Taylor noted that the futures market – which projects prices at certain points in the future – is seeing lumber trading at $655 for July to September, even higher than its current levels. Still, that should be taken with a pinch of salt, he said.

“It’s just that it doesn’t really reflect reality – but it is reflecting some bullishness right now because the market is a bit tight,” he said. “The futures market is not a reflection really of what’s going to happen, it’s what they think is going to happen.

“I think by the end of July into August, we’ll see a correction and we’ll see where futures are trading then.”

The Bank of Canada has frequently cited the negative impact of supply chain disruptions on the Canadian and global economies, noting in its last policy rate announcement that ongoing complications were “weighing on activity and boosting inflation.”

It also said Russia’s February invasion of Ukraine and COVID-19 lockdowns in China were having a detrimental effect, with the former helping push prices upward – notably for energy and agricultural commodities.