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Homebuilders are seeing more cancellations following the sharp rise in mortgage interest rates.

Justin Sullivan/Getty Images

Timber prices have fallen more than 60% since the start of the year, but don’t count on a recovery soon. Rising interest rates and inflation will continue to dampen demand for single-family homes.

“Homebuilders have faced a huge increase in cancellations over the past few months due to the sharp rise in mortgage rates and the resulting weakening demand for home purchases,” says Alexander Snyder, portfolio manager, real estate securities, at CenterSquare Investment Management. “The runoff from higher rates translates into lower demand for new homes, which leads to lower demand for lumber, which leads to lower lumber prices.”

The most active November futures contract for random length lumber settled at $410.80 per thousand board feet on September 26. This is the lowest settlement since June 2020 and prices are down 64% since the start of the year, according to Dow Jones Market Data. Prices have lost around 75% from the peak price during the Covid-19 pandemic of $1,670.50 on May 7, 2021.

“Lumber has seen a complete destruction of demand from a housing perspective,” says Greg Kuta, president and CEO of lumber broker Westline Capital Strategies. It’s been a “one-two punch” in the form of demand destruction with all sorts of higher ratchets in interest rates.

When you factor in higher inflation, price appreciation over the past year, and higher interest rates, “the single-family component of housing is annihilating,” he says. .

There’s still a housing shortage, but you’re seeing a “shift,” from single-family homes to multi-family homes, which don’t require as much “dimensional lumber consumption” as single-family homes, Kuta says.

Construction of new US homes, also known as housing starts, has fallen sharply in recent months, posting declines of 10.9% each, in June and July, according to Commerce Department data.

Housing starts in Augusthowever, climbed 12.2% seasonally adjusted to 1.58 million thanks to an increase in the construction of new apartments.

Homes are “still very expensive for first-time home buyers,” says Kuta. He roughly estimates that average mortgage payments are between $1,800 and $1,900 per month, while the cost of renting is between $1,100 and $1,200.

“You see a demand for housing. It’s just a matter of moving to the multi-family component now, at the expense of the single-family [homes],” he says.

That said, Kuta believes that demand will no longer be the “savior” of the lumber market. “There will be supply constraints,” and market supply of lumber will likely be more “reactionary,” with producers pulling production from the market as needed, he says.

Softwood lumber is “undoubtedly a strong predictor of what is sure to come” for the economic outlook. “All products, including wood, go continue to be under pressure.”

Meanwhile, last month’s launch of a new timber futures contract got off to a slow start, “like a herd of turtles,” Kuta says. The sizing of the new contract is 27,500 board feet, a quarter of the size of the old contracts. The last contract listed for the old contract is for May 2023, so by the end of the year, in the first quarter of next year, there will probably be a “mass transfer” from the old contract to the new contract, says Kuta.

There’s “more than better” in store for lumber from a cash-flow perspective, he says. Looking ahead, however, there are simply “too many headwinds facing lumber,” says Kuta.

The price downside is probably between $400 and $350, he says. The market will struggle to get back to $550-$600 unless there is some sort of supply constraint or market shock.