Why Lumber Won’t Boom In 2022

This year’s mega-bubble in lumber prices likely won’t stage a repeat performance next year. The problem is the economically sensitive housing sector is set to have a slowdown as interest rates and inflation squeeze would-be homebuyer wallets.

The result will be falling lumber prices, experts say.

“Can Lumber demand and the housing market hold up if the US economy heads into recession in 2022?,” writes Shawn Hackett in a recent report for the Hackett Money Flow Commodity Report. “ We do not believe that is can or will.”

For sure, building permits have been issued this year at a far higher rate than in 2020. The most recent statistics of a seasonally adjusted annualized rate of 1.7 million in November should look bullish for lumber prices.

The pandemic wreaked havoc on the lumber market during 2021 as families fled urban areas in favor of finding homes in suburbia or rural areas. However, that increased demand ran into problems at lumber mills who couldn’t find enough workers to process felled trees into usable building materials.

The result was the price of lumber soared to its highest level on record in early May, reaching the staggering level of more than $1,600 per thousand board feet, up from less than $900 at the beginning of the year. Prices have subsequently dipped to $1,052 recently.

Hackett now sees lumber prices staying subdued as recent bumper level home construction runs into the economic reality of slowing housing demand. Lumber prices are usually closely linked to the construction of new homes as wood is a major cost of building single-family homes.

The reason that homebuilding doesn’t look set to stay elevated is because of current raging inflation and the prospect of higher borrowing costs. The Federal Reserve is signaling that it will raise interest rates substantially next year, which in turn would reduce the buying power of people wanting to obtain a mortgage. It’s also noteworthy that recessions often occur close to when the Fed raises interest rates.

Separately, rising inflation, which reached 6.8% in November, is increasingly cutting into household budgets leaving potential home buyers with lower disposable income than previously.

In other words, now might not be the time to invest in lumber for the long term.