Lumber prices fall to a new low this year as reality sets in that the housing market is 'going back to normal'
- Lumber prices continued their downtrend on Wednesday, falling 5% to a new 2022 low of $495 per thousand board feet.
- The sell-off came as homebuilders adjust to the new reality of a housing market that is "going back to normal."
- "The last couple years are going to be an outlier as far as [home] pricing goes," LGI Homes CEO Eric Lipar said.
Lumber prices continued their descent on Wednesday, falling as much as 5% to a new 2022 low of $495 per thousand board feet.
The essential building commodity has seen a wild ride since the start of the COVID-19 pandemic, with prices peaking at a record high of $1,733 per thousand board feet as demand for homes picked up and supply chain woes plagued saw mills across Canada.
But since lumber's May 2021 peak, it's been nothing but downhill for the commodity, with a peak-to-trough decline of 71%. The weakness accelerated in 2022 as higher mortgage rates helped cool down the booming housing market, which fueled demand for lumber as homebuilders sought to cash in on the demand spike.
"For the last couple of years it's just been an unbelievable market where all the builders are taking orders, everybody is having phenomenal success, everybody is having phenomenal margins," LGI Homes CEO Eric Lipar said in the company's earnings conference call on Tuesday.
LGI Homes is a builder of single family homes across Western and Southeastern states and has benefited from the higher margins amid the COVID-19 induced housing demand boom. But those margins aren't sustainable as demand for homes cools down and prices show signs of falling in some markets.
"We will normalize our pricing. Yes, we will probably be selling the same floor plans in the future for less money than we were over the last 24 months. But it's going to be similar to what it was two years and three years ago, because the last couple years are just going to be an outlier as far as [home] pricing goes," Lipar said.
That's good news for up and coming home buyers that have been boxed out of the market due to rising home prices and limited supply of homes for sale. The recent surge in mortgage rates hasn't helped with affordability, but the average 30-year fixed mortgage rate has fallen more than 50 basis points from its peak in June, offering some relief.
The decline in lumber prices also backs up the view that based on it and other commodity prices that have fallen in recent months, inflation could finally be easing, something both the Fed and consumers are eagerly anticipating.
Ultimately, the housing market is on its way back to normal, and that means lumber prices are likely to remain back in the normal trading range prior to 2020 of $200-$600 per thousand board feet.
"A 33%, adjusted gross margin, we are very unlikely never to post that, again, in our history. It's such an outlier in gross margin. And we are just going back to normal," Lipar said.