Lumber prices are falling: good news for real estate investors
On Tuesday, June 16th, lumber prices dropped 41%, from their highest level of over $1700 in May to just above $1000. The news sent hopes rising in the real estate market. In recent months, many investors and industry professionals had despaired that skyrocketing lumber prices would kill the booming housing market. Now, that dread appears to have diminished. Indeed, commodities watchers are predicting that the price of lumber has even further to slide before stabilizing.
What caused lumber prices to go through the roof?
What caused lumber prices to soar and why are they plummeting now? As with many other things over this weird past year, the answer is related to the pandemic. Pre-pandemic, lumber traded in the range of $300 to $500 per thousand board feet. Like many other products in 2020, lumber prices also saw a steep rise as mills were forced to close or slow production. A boom in pandemic-induced home improvement projects and the higher demand for housing, along with mill production cuts and other supply-side constraints combined to raise prices. As Ole Hansen, head of commodities at Saxo Bank and a leading authority in the field, told Business Insider: “People going crazy in their backyards, redoing their houses, or buying a bigger house” had caused prices to soar.
So what is causing lumber prices to crash to earth? On the demand side, homebuilders, DIYers, and the construction industry are all finally saying no to the exorbitant price of lumber. This is reflected in the stats for new home construction — down 8.8% in May from the 14-year high set in March. Home-improvement sales were also down 8.1% in May compared with the all-time peak set in March. On the supply side, the lumber industry has increased production, incentivized by the record prices.
As the post-pandemic economic recovery gathers momentum and supply starts to meet demand, we’re seeing downward pressure on the price of lumber. However, it has a very long way to go before returning to pre-pandemic levels. Even with the recent drop, lumber prices are still 240% higher than they were in the spring of 2020, when the world went into lockdown.
Out of the wood yet?
Real estate investors can take heart that the housing boom will not be held back by high lumber prices. The numbers show that the housing market is still red hot: new home construction in May 2021 was 50% higher over May 2020, and 21% higher vs. May 2019.
And it’s not just falling lumber prices that are cause for good cheer in the housing market. Copper, another critical material, could drop another 10% from its current price level over the summer. Currently, copper is down roughly 10% from May’s high of around $10,750 per ton. All said and done, things are looking positive for real estate investors — knock on wood!
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