Why lumber prices have already bottomed, but will see upside capped at 15% over the next 2 years, according to an investing chief

• The price of lumber has already bottomed, says Mace McCain, the chief investment officer of Frost Investment Advisors.
• But he also doesn't expect prices to surge anew. McCain expects rangebound trading capping out at the $600 level over the next two years.
• "[Lumber] is reaching a state of equilibrium because housing is reaching a state of equilibrium," he said.

The price of lumber has already bottomed, according to Mace McCain, chief investment officer at Frost Investment Advisors. But he's not expecting a runaway rebound either.

Instead, McCain sees lumber trading rangebound in the $500 to $600 per thousand board feet range for the next two years, reflecting just 15% upside from current levels over the period.

The relatively sideways trading will be a result of two conflicting forces, according to McCain. First is the ongoing housing shortage in the US, a positive driver for lumber prices that should keep them well above pre-virus levels, no lower than $500.

But McCain also notes that surging home prices are also dissuading buyers and sapping demand, hence the $600 cap on how high lumber can go over the next 24 months. It's a middle ground he refers to as "equilibrium."

"We're out of the panic buying. We're out of the massive industry shortages. We're out of the extremes," he told Insider in an interview. "[Lumber] is reaching a state of equilibrium because housing is reaching a state of equilibrium. We're going to see a stabilization."

One outlier scenario McCain sees dragging lumber prices below his stated range would be the Federal Reserve starting to aggressively hike interest rates. But it's not his base case.

"The main thing that usually will soften a real estate market is when the Fed decides to tighten and interest rates go up," he told Insider. "I don't think the Fed is going to be aggressive. I don't think the Fed is going to do anything to destroy the mortgage market."

Lumber futures slipped as much as 5% on Wednesday, to $502.30 per thousand board feet. They're currently 70% below their record high of $1,711 reached in May.

Prior to that record, lumber prices had skyrocketed more than 500% in the 15 months after the COVID-19 outbreak as supply-chain disruptions collided with a renewed acceleration in homebuilder growth.

With the emergence of a more contagious Delta variant, McCain remains optimistic the industry will not see a repeat of what happened in 2020 when most sawmills halted operations amid a pandemic lockdown.

"I don't think the lumber industry is necessarily going to be shut down," he said. "I think they've learned to cope with it. We're not going to see barriers to supply."

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