Lumber Prices Unveil Negative Double Impact from Higher Interest Rates and Inventory Buildup

Lumber prices fell as much as 6% on Monday, May 9th, to drop to its lowest level so far this year, falling below $800 and even plunging to a low of $780 per thousand board feet during the session. Apparently, rapidly appreciating USD weighs on almost all types of assets including most commodities, however, lumber looks to have suffered from a double impact.

The decline extends an already tough year for the essential building construction commodity, with lumber prices down 30% year-to-date, and down 13% over the past week. The decline comes as mortgage rates soar to levels not seen since 2009, on the back of the U.S. Fed’s monetary tightening. Thus, the popular U.S. 30-year fixed mortgage rate hit 5.27% last week, well above the 3.11% rate it was at the start of the year.

According to a recent survey conducted by John Burns Real Estate Consulting, the swift rise in mortgage rates is starting to have a negative impact on demand in the home building market, so retaining investment in REITs might be a loss-making idea now. But that could also mean the downside pressure in lumber prices may accelerate.

Moreover, lumber inventory is piling up because of transportation snarls and cross-border Covid-restriction protests that have left many of North America's top producers with stockpiles at sawmills, and with a lack of railcars and damaged roads. The backlog is especially serious in western Canada, where some lumber companies including West Fraser and Canfor have cut back on operations.

The pressure on lumber prices can be long lasting if the housing market profoundly slows down, making home prices continuously unaffordable, and given that the seasonal demand for lumber often seen during spring building months is not supporting prices so far this year.