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What 2022 lumber prices are telling us

What 2022 lumber prices are telling us
by Brad Cartier, posted in Newsletter

Fergal McAlinden of CMP opens up the week by discussing the recent price decline of lumber. In April 2021, the cost per thousand board feet hit almost $1,200, which was a year-over-year increase of an astonishing 250%. Shortly after, prices even hit $1,700. Now, prices hit a fresh low of $550 and are currently sitting at slightly above $700.

Price of lumber dropping - Fortune

Source: Fortune (July 2022)

For builders, this has important implications according to Better Dwelling: “When lumber prices were soaring many suppliers began to cut back on inventories. This helped prevent being stuck with overpriced inventory if they couldn’t sell. When prices looked like they’d never fall, users such as home builders began pre-buying inventories as a hedge against rising costs. When prices were rising, it worked in their favor helping to increase profits. Now the trend should be working in the opposite direction, making prices sticky on the way down.”

Greg Glover of Markets Insider discusses this price drop, noting that in addition to rising interest rates and slowing price growth, the slide in lumber commodity prices shows demand is moderating. Glover notes that this, among other commodity price drops, is a signal for a looming recession.

Finally, Madison’s Lumber Reporter recently reported that we are seeing a renewed demand for lumber given the lower prices, but that “[i]t is not known yet whether this year will see the usual seasonal price cycle; a lot depends on macroeconomic conditions like housing starts, and on weather emergencies like storms, floods, or fires.”

Price cycle of Lumber - Madison

Source: Madison’s Lumber Reporter (July 2022)

Affordability update

The National Association of Realtors (NAR) released new housing affordability data showing a continued decline in that index nationally.

Housing affordability declines - NAR

Source: NAR (July 2022)

An index above 100 “means that a family with the median income had more than the income required to afford a median-priced home.”

Nicole Friedman of the Wall Street Journal (subscription required) reports on the NAR announcement, noting that this is the lowest affordability rate since 2006. “On a national basis, homebuying was relatively affordable in 2020 and last year, thanks to record-low mortgage rates even as strong demand sent home prices skyrocketing. But this year, mortgage rates have moved up sharply and house prices have climbed to new highs nationwide.

Matt Carter of Inman (subscription required) reports on the affordability pinch, pointing to a recent survey where half of the respondents said it would be difficult for them to obtain a mortgage today, the highest level since 2014. As a result of rising rates, more would-be homeowners are priced out of the market which will lead to a deceleration and possible drop in housing prices. Carter points to a Fannie Mae forecast that sales volume will fall 13.5% this year.

A separate Yardeni affordability index confirms the above NAR data showing affordability is at its lowest level since 2006, but is also close to the affordability lows of the 1980s when interest rates were well above 12%.

Affordability almost as low as 1980s - Yardeni

Source: Yardeni (July 2022)

Jobs report

That said, according to Housing Wire there is some positive news coming out of the most recent June jobs report. In all, another 372,000 jobs were added in June and unemployment sat at 3.6%, getting us closer to pre-pandemic employment levels.

“A tighter labor market is a good thing; this means people with less educational backgrounds can get employed as we have many jobs that don’t require a college education. The unemployment rate did tick up for those with less than a high school diploma in this report.”

Daniel Houston of Inman (subscription required) reports on what the latest jobs data means for real estate, noting that real estate employers in the financial sector added 3,700 jobs. “That’s a slowdown from previous months — employers added 6,100 real estate jobs in April and 7,400 in May — but still a healthy number that tracks with the economy’s pace as a whole during a surprisingly strong month of job growth.”

Jeff Cox of CNBC comments on the data, noting that this positive news puts a damper on fears of a looming recession. Low unemployment and positive job growth don’t jive with those predicting an economic recession. That said, the GDP contracted 1.6% in Q1 2022 and is on pace to decline as well in Q2, which will officially put the U.S. in a recession despite the strong job signals.

For rental housing, Nick Mordowanec of Newsweek reports that the data “showed an increase of 13,000 construction jobs related to the building of homes and apartments in June—or less than half compared to the previous month. This could mean an extended housing shortage, which Lawrence Yun, chief economist at the National Association of Realtors, said will cause apartment rents to increase and potentially raise the cost of buying a home.”

For more, read Scott Horsley’s NPR article titled, Hiring slipped only slightly in June, with no sign of a looming recession.

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