North American softwood lumber prices are seeking direction

An equilibrium in supply and demand may have finally been met for N. American softwood lumber prices, which have sought direction in recent weeks.

The essential building commodity is trading about flat since the start of July as the housing market shows signs of slowing down due to the recent surge in mortgage rates.

Softwood lumber prices have surged as much as 45% from their June low, but those gains have since deteriorated to less than 25% as more signs suggest that homebuilding activity is coming to a halt due to less demand from home buyers.

Gains from the June low of $517 per thousand board feet were sparked by temporary relief in sky-high mortgage rates, which fell about 50 basis points in just a couple weeks, according to data from Freddie Mac. But most of those gains have evaporated as the key 30-year fixed mortgage rate still remains elevated at multi-year highs.

The swift doubling in mortgage rates this year, from about 3.0% in January to close to 6% today, led to a quick slowdown in homebuilding activity as monthly costs became unaffordable for homebuyers. That’s a problem for the lumber industry, as homebuilding demand is the main driver of lumber prices.

The other driver, supply, is showing signs of easing as mills in British Columbia get back on line following debilitating floods late last year.

That slowdown showed up in the NAHB/Well’s Fargo Housing Market Index last week, which fell 12 points to 55 for new single-family home builds in July. That represents the lowest reading since March of 2020 and the second largest single-month decline in the history of the index.

Homebuilder comments from a June survey conducted by John Burns Real Estate Consulting echo the sharp decline in the NAHB index. The main themes of the survey are new home buyers are backing out, home price cuts are becoming common, and cost pressures in the construction industry are finally easing, according to John Burns’ Rick Palacios Jr.

“Someone turned out the light on our sales in June,” an Atlanta homebuilder said in the survey. Meanwhile, a homebuilder in Austin said, “Sales have fallen off a cliff. We’re selling one-third of what we sold in March and April.”

Falling softwood lumber prices and other commodities like metals and oil could mean a slowdown in inflation is just around the corner. That would be a reprieve for many stock market investors who have dealt with an orderly bear market in the first half of the year.

Softwood lumber prices are down 44% year-to-date, are down 63% from their record May 2021 high, and traded down just 0.29% in Tuesday trades.