Bubble Watch: Could soaring lumber prices hammer housing?

“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: The price of lumber, a key home construction material, has tripled off its mid-lockdown lows.

Source: Many. For this column, I’ll use Macrotrends’ tracking of a key commodity markets benchmark price.

The Trend

The rebounding home construction business has gotten antsy over lumber costs. Between April 1 and Aug. 27, commodity traders bid up lumber to $850 per 1,000 board feet from $260.

That’s a 227% jump up off a four-year low to a record high.

The Dissection

Let’s first note that commodity markets can — and will — do crazy things. Especially in times of economic extremes, up and down.

Who could forget negative crude oil prices — yes, prices below zero — in April amid coronavirus-whipped panicked trading.

This year actually started out with housing’s outlook looking promising. Lumber futures hit $463 in mid-February, the highest since mid-2018.

Then the pandemic hit. Lockdowns became the norm, bringing construction to a near halt. Lumber mills were idled.

In 29 trading days, lumber fell 44% — to $260 on April 1. It was the largest drop in such a timeframe in the futures’ history dating to 1973.

Then came a reversal as the economic gods were kind to housing.

Market fears were soothed by easy loan forbearance programs for ailing borrowers and historically low mortgage rates. With more people working from home — not to mention home-schooling their children — new housing and remodeling efforts became priorities.

The rush for wood was amplified by unexpected projects such as building outdoor seating for restaurants who were banned from serving indoors. All of a sudden, “lumber shortage” was the talk.

In 103 trading days, the commodity market price more than tripled to $850, easily topping May 2018’s old high of $639 along the way. Yes, it was the largest upswing in such a timeframe on record.

Another angle

The National Association of Home Builders estimates lumber’s spike would add roughly $16,000 in costs to a typical newly built home of just under 2,500 square feet in size.

That’s a noteworthy cost boost for what’s hot right now: more affordable housing markets, such as the Inland Empire.

“Housing has been a bright spot for the U.S. economy, with low interest rates and a desire for more space boosting demand for new homes, particularly in affordable, lower density markets,” says Robert Dietz, the trade group’s chief economist. “However, that bright spot could flicker as buyers are priced out of the market due to escalating lumber and other material costs.”

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … TWO BUBBLES!

Lumber’s “bubble” has already cured itself a bit, with prices falling 25% off its recent peak.

But forget the market gyrations. We are talking about a surge in a key homebuilding material — not to mention do-it-yourself projects.

The big question: Is this a just a volatile market’s pricing issue or a serious supply shortage?

Builders can choose to take less profit or let home prices rise and lower “affordability” for some house hunters. But if there’s no lumber, there’s nothing to sell.

“Availability is key for the economics — that is the real world of nuts, bolts, and lumber,” economist Dietz says. “Pricing is the signal that says availability is strained. Supply chains are disrupted, which means there are limits to how much home construction can occur in 2020 despite improving demand.”

Source: Orange County Register