The big wood bubble of 2021 has burst.
After a staggering rally this spring, timber prices have fallen back to the ground as supply has risen, speculative trades have waned and demand for home construction has waned. Wood futures are down 42% in June alone, marking their worst month since early 1978. Construction raw materials fell by more than 13% in 2021 and are heading for the first negative first half of the year since 2015.
At their peak on May 7, timber prices hit an all-time high of $ 1,670.50 per thousand board feet on a closing basis, more than six times higher than their April 2020 pandemic low.
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The quick reversal of the month-long rally of lumber came when Americans went back on vacation in the midst of the economic reopening instead of taking on renovation and construction projects. Many who fear persistent inflation also consoled themselves in the sharp fall in prices in the face of falling demand.
“This decline suggests that the cause of this inflation – the supply-demand mismatch – won’t last forever,” said Brad McMillan, CIO, Commonwealth Financial Network. “When suppliers from all industries join forces, these bottlenecks will go away along with inflation. That seems to be happening now for wood and will happen later for other inputs. “
Goldman Sachs analysts said Tuesday that their channel reviews indicated that consumers were becoming more reluctant on some home improvement projects due to the rapid surge in commodity prices this year, particularly wood.
Earlier this year, timber prices skyrocketed due to a combination of reduced supply due to plant closings and increasing demand for new and improved homes. According to the National Association of Home Builders, the shortage of wood caused the average price for a new single-family home to rise by nearly $ 36,000.
The scorching housing market also saw a record shortage of available housing. In April, around 1 in 4 apartments for sale were newly built, the highest proportion ever. Historically, around 1 in 10 are new builds.
Lately there have been signs that the real estate boom is fizzling out. Weekly mortgage demand fell 6.9% last week to its lowest level in nearly a year and a half.
Now, wood futures prices are well on their way to posting their sixth straight weekly loss and undoing their entire 2021 rally. The price fell another 5.2% on Wednesday to around $ 718 per thousand board feet.
“It was a bubble, but it’s still double what it was before Covid,” said Peter Boockvar, CIO of the Bleakley Advisory Group. Still, Boockvar believes just because the wood bubble may have popped doesn’t mean the threat of inflation isn’t real.
The investor referred to the CRB Raw Industrials Index, which is currently at a 10-year high. The index tracks materials that are not traded on a futures exchange and thus better reflects the actual supply and demand and not the behavior of speculators.
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