The strength of that prediction is why economists and analysts are once again paying attention to lumber: After nosediving to $383 per thousand board feet by the end of 2022, lumber futures jumped 19% to $454 on Wednesday.
Does the slight increase in lumber prices — which floated between $350 and $550 in the years before the pandemic — just mean that lumber is near? Or does it signal a rebound in the slumping US housing market?
To better understand where the U.S. lumber and housing market could be headed next, fortune reached Dustin Jalbert, senior wood products economist at Fastmarkets.
Here are Jalbert’s five bold predictions about where the lumber market will be next.
1. US housing began to have more to fall
Jalbert expects U.S. housing to start contracting for the second time this year. The reasoning? New home sales in the U.S. have been off by 20-30% since the beginning of last year due to “decreasing housing affordability,” fueled by high mortgage rates and high home prices. Cooling demand is compounded by the number of homes currently under construction, which creates a “shadow” inventory flow, increasing oversupply and causing housing retreats.
Although it has been predicted that housing starts will decrease this year, the exact difference is different. Jalbert expects housing to decline 13%, which he says leans toward the optimistic side. The outlook is somewhat bleak for single-family homes, which are predicted to decline 16% in 2023 as mortgage rates continue to hover around 6%. However, for multifamily starts, Jalbert predicts a 7% decline this year.
The difference between the two outlooks is based on strong apartment demand that is expected to attract multifamily starting to move forward. But supply chain disruptions, labor shortages, rental growth, and challenging financial conditions will put the same downward pressure on multifamily startups as single-family startups.
2. The demand for wood will decrease again
US wood consumption will decline between 4% and 5% in 2023, Jalbert predicts. They estimate that in 2022, wood consumption will decrease by 1.6% as a result of “a sudden weakness in new house construction activity in the second half of the year and a major correction in do-it-yourself (DIY) wood demand.”
Moving forward, the repair and remodeling market will moderate some loss of demand, while professional remodeling is likely to weaken with the decline in national home prices.
A 4% to 5% decline in wood consumption (or 2.2 billion board feet) would be the largest one-year decline since 2009—a year that saw a decline of 8 billion board feet.
Although the predicted decline will not be catastrophic, it will be a challenge for building materials retailers, wholesalers, and factory operators.
3. Record volatility in timber prices since 2020 has ended
The volatility in timber prices that has plagued the market since 2020 has ended due to a drop in demand, Jalbert suggested. And while lean supplies may drive lumber prices up, they can’t do so without demand — so the record volatility seen since spring 2020 “appears to be in the rearview mirror now.”
4. There are more British Columbia sawmill closures on the horizon
Jalbert expects that “a large part of the industry’s capacity is set to close,” due to weak market conditions and constraints on long-term fiber availability. He expects these indefinite or permanent closures to take effect in Canadian provinces after a few rounds of temporary sawmills. curtailments, coupled with weakening demand and low timber prices.
“This will be a key factor helping to tighten the market, especially in the second half of 2023 when we expect demand to begin to reverse and many production cuts will be felt,” Jalbert wrote.
In total, he expects British Columbia sawmill closures to eliminate 1.5 billion board feet of production capacity.
5. Inflation – and mortgage rates – will fall sharply in 2023
Inflation will decline significantly in the second half of this year, closer to the Federal Reserve’s 2% target, Jalbert predicted. With that, the Fed could choose to stop raising interest rates and thus mortgage rates could fall, thus revitalizing home buying activity.
That, of course, will be welcomed by home builders and wood manufacturers.
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