Lumber Prices Fall to a New Low: Reality Sets In for the Housing Market
It's been a tough year for the lumber industry. Prices have fallen to a new low as reality sets in that the housing market is returning to normal. This means that there will be less demand for lumber, and prices will continue to decline. Many analysts are predicting that prices could fall by another 20% by the end of the year. So what does this mean for the housing market?
It's important to remember that the lumber industry is just one piece of the puzzle. There are many other factors that contribute to the health of the housing market, such as job growth, interest rates, and consumer confidence. So while a decline in lumber prices may be a sign that the market is returning to normal, it's not necessarily a bad thing. In fact, it could be a good thing for buyers who are looking to get into the market.
On wednesday, the price of lumber continued to decline, dropping 5% to a new 2022 low of $495 for every thousand board feet.
The sell-off occurred as homebuilders adapted to the "getting back to normal" housing market reality.
According to [house] price, the previous two years will be exceptional, according to LGI Homes CEO Eric Lipar.
Last Wednesday the price of lumber continued to drop, dropping as much as 5% to a new 2022 low of $495 per thousand board feet.
Since the beginning of the COVID-19 pandemic, the price of this crucial building material has fluctuated wildly, reaching a record high of $1,733 per thousand board feet as housing demand increased and supply chain issues beset sawmills across Canada.
However, since the commodity's top in May 2021, it has been all downhill for timber, with a peak-to-trough loss of 71 percent. The housing market's rapid expansion was slowed down by rising mortgage rates in 2022, which increased demand for lumber as homebuilders tried to capitalize on the surge in demand.
During the company's earnings conference call on Tuesday, LGI Homes CEO Eric Lipar said, "For the last couple of years it's just been an extraordinary market where all the builders are receiving orders, everybody is having phenomenal success, and everybody is having phenomenal profits."
The increased margins during the COVID-19-induced surge in housing demand have helped LGI Homes, a builder of single-family homes in Western and Southeastern states. However, if home demand slows and prices in some regions begin to decline, those margins are no longer viable.
The last two years are just going to be an outlier as far as [home] pricing goes, Lipar said. "We will normalize our pricing. Yes, we will probably be selling the same floor plans in the future for less money than we were over the last 24 months, but it's going to be similar to what it was two years and three years ago."
That's good news for aspiring house buyers who have been shut out of the market as a result of soaring property prices and a dearth of available properties. Affordability hasn't improved due to the recent spike in mortgage rates, but there has been some respite as the average 30-year fixed mortgage rate has dropped by more than 50 basis points since June, when it reached its peak.
The drop in lumber prices supports the idea that, as a result of it and other commodity prices that have decreased recently, inflation may finally be slowing down, which is something that both the Fed and consumers are keen to see.
In the end, the housing industry is returning to normal, which implies lumber prices are expected to stay within the typical trading range of $200 to $600 per thousand board feet before 2020.
A 33 percent adjusted gross margin is "such an aberration in gross margin that we are just going back to normal," Lipar said. "We are quite unlikely never to post that, again, in our history."
So if you're thinking about buying a home this year, don't let the decline in lumber prices deter you. The market is still a great place to buy, and there are plenty of deals to be had. Just be sure to do your research and work with a knowledgeable real estate agent to find the right home for you.
Have you been affected by the decline in lumber prices? Share your story in the comments below!
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