- Lumber prices fell 4% to a new 2022 low on Tuesday as the housing market continues to cool off.
- The decline came on the same day Goldman Sachs warned that it expects a continued decline in the housing market.
- "The sustained reduction in affordability, waning pandemic tailwind, and recent decline in purchasing intentions suggest that home sales are likely to fall further," Goldman said.
Lumber prices fell to a new 2022 low on Tuesday as higher mortgage rates continue to weigh on a slowing housing market.
The essential building commodity fell as much as 4% on Tuesday to $465 per thousand board feet, decisively below the low seen in early August of $470.
While the decline in lumber may be seen by some as a positive sign that inflation is continuing to cool, it is also indicative of a housing market slowdown that may last longer than expected.
And Goldman Sachs expects just that, as it argued in a Tuesday note the home sales are set to decline further after already cooling significantly since the Fed began its interest rate hikes, which sent mortgage rates soaring above 5%.
"The sustained reduction in affordability, waning pandemic tailwind, and recent decline in purchasing intentions suggest that home sales are likely to fall further," Goldman said. The bank expects existing home sales to fall 12% in August, while it expects new home sales to be flat.
Home prices have remained relatively resilient even as sales have cooled down. But Goldman expects that to change soon.
"Our model suggests that home price growth will slow sharply in the next couple quarters... as the imbalance between supply and demand continues to shrink, mostly through lower demand," analysts said.
Longer-term, Goldman still expects a demographic tailwind from millennials to help support the housing market, but a recent decline in purchasing intentions illustrates how sensitive this group of buyers is to higher mortgage rates.
Still, while Goldman expects housing to slowdown, it doesn't mean a deep recession will follow as it did during the last housing bust in 2007.
"Past housing downturns have typically been accompanied by economywide recessions, which led to an influx of housing supply as unemployment rose and individuals were forced to sell their homes. However, an influx of supply from this channel seems unlikely this cycle: the labor market remains robust (and likely will, even in a mild recession), and household balance sheets are extremely strong," Goldman said.
As the housing market cools off, so are lumber prices, which briefly surged to a record high of $1,733 per thousand board feet in 2021. But if the housing market returns to its pre-pandemic state, so too could lumber prices, which have historically traded between a range of $200 to $600 per thousand board feet.