Red-hot lumber prices may cool housing boom

Lumber prices are up 395% from their pandemic lows

Soaring lumber prices are holding back a U.S. housing market.

The number of building permits issued in March rose 2.7% month over month to a seasonally adjusted annualized rate of 1.766 million. The uptick is a mere blip on the radar compared with the 19.4% increase in housing starts, which grew at their fastest pace in nearly 16 years. Typically, building begins within two months of issuance, according to the National Association of Home Builders. 

Some developers have "held back on projects on the expectation that prices will soon fall back," wrote Matthew Pointon, senior property economist at the research firm Capital Economics.  

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HOUSING SHORTAGE CROPS UP AS MILLENNIALS START BUYING HOUSES

Front-month lumber futures traded at CME Group have climbed 47% this year to $1,286 per thousand board feet. Prices are up 395% from their April 2020 pandemic low of below $260. 

Source: FactSet, Dow Jones Market Data

The sharp rise in prices comes as lumber supplies have been depleted this year as Americans took up home-improvement projects while cooped up at home during the COVID-19 pandemic. 

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Restaurants added to the supply crunch by building up outdoor seating capacity to service customers who were not allowed to dine indoors.   

AP Photo/Steve Helber

All of that was compounded by a sharp decline in production as mills were shut in during the early days of the pandemic and slow to ramp up production. 

Surging prices have made it "virtually impossible to negotiate a deal with a prospective homebuyer that won't be changed before you even start construction," Jerry Howard, CEO of the National Association of Homebuilders, told FOX Business last month. 

He said the increase in prices has boosted the price of a new home by tens of thousands of dollars, and builders are having to add escalator clauses to contracts. A recent report from CoreLogic found that home prices were up 10.4% year over year in February, posting their largest increase since 2006 – right before the real estate bubble burst. 

The current up move in lumber prices has "mania characteristics," wrote David Rosenberg, chief economist and strategist at the Toronto-based Rosenberg Research. 

He warned prices may not let up anytime soon as they can "stay overbought for lengthy stretches before finally unwinding."

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Regardless of where prices go from here, homebuilders may not be able to wait much longer to start building. 

"A large backlog of homes which have been authorized but not started will support single-family construction this year," Pointon wrote.