Timber prices are down more than 60% so far this year, but don’t count on a recovery soon. Interest rates and inflation will continue to rise Slow demand for single family homes.
“Home builders have faced an exponential rise in cancellations over the past several months due to a sharp rise in mortgage rates and an associated decline in home purchase demand,” says Alexander Snyder, portfolio manager, real estate securities, at CenterSquare Investment Management. “The flow of higher rates leads to lower demand for new homes, which leads to lower demand for wood, which leads to lower wood prices.”
The most active November futures contract for random-length timber settled at $410.80 per thousand panel feet on September 26. This is the lowest settlement since June 2020 and prices are down 64% year-to-date, according to market data from Dow Jones. Prices lost about 75% of their peak during the Covid-19 pandemic of $1,670.50 on May 7, 2021.
“Lumber has seen a complete destruction of demand from a housing standpoint,” says Greg Cota, president and CEO of timber broker Westline Capital Strategies. It was a “knockout” in the form of destroying demand with every kind of interest rate hike.
When you take into account the high rate of inflation, the rise in prices over the past year, and Higher interest rates“The single-family component of housing is disappearing,” he says.
There’s still a housing shortage, but you’re seeing a “conversion” away from single-family homes to multi-family homes, which don’t require nearly as much “dimensional frame wood consumption” as single-family homes, Cotta says.
Construction in new US homes, also known as home construction, has fallen sharply in recent months, posting a 10.9% decrease each, in June and July, according to data from the Commerce Department.
Housing starts in AugustHowever, it rose 12.2%, seasonally adjusted, to 1.58 million on the back of a surge in new apartment construction.
Homes are “still too expensive for first-time homebuyers,” Cotta says. It is roughly estimated that average mortgage payments are somewhere between $1,800 and $1,900 per month, while the cost of renting is somewhere between $1,100 and $1,200.
“You’re seeing demand for housing. It’s just turning into a multi-family component now, at the expense of the single-family. [homes],” He says.
However, Kota believes that demand is no longer a “savior” for the timber market. “It will be supply constraints,” he says, and the supply side of the timber market is likely to be “regressive,” with producers taking production out of the market when needed.
Wood is “certainly a solid precursor to what is certain” for the economic outlook. “All goods, including wood, will go to continue to be under pressure. “
Meanwhile, the launch of a new lumber futures contract last month had a slow start, “like a flock of turtles,” says Cotta. The size of the new contract is 27,500 panel feet, which is a quarter of the size of the old contracts. The last contract listed for the old contract is May 2023, so between now and the end of the year, through the first quarter of next year, there will likely be a “huge shift” from the old contract to the new one, Kota says.
From a liquidity standpoint, he says, there are “bigger things than better” for timber. Still, looking into the future, there are “too many headwinds facing the wood,” says Cotta.
The downside to prices is likely to be somewhere in the $400-$350 region, he says. The market will struggle to get back to $550 to $600, unless there is some kind of supply restriction event or shock to the market.
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