Lumber has the dubious honor of being one of the biggest dropouts this year, and the market’s outlook isn’t going to improve anytime soon.
Wood of random length delivered in January
stable at $423.80 per 1,000 plank feet as of November 29, down about 63% year-to-date.
Walter Kunisch Jr., senior analyst at HTS Commodities said: “CME lumber futures are by far the worst performing commodity futures in 2022. “Lack of confidence in the market. U.S. housing, amid strong increases in interest rates and mortgage rates, is creating headwinds and reducing demand for lumber.”
According to the Commerce Department, new U.S. residential construction fell 4.2 percent in October to a seasonally adjusted annual rate of 1.425 million. It is a sign of weaker construction activity when housing market war with mortgage rates rising rapidly.
“The Federal Reserve’s commitment to combating U.S. inflation, combined with tightening underwriting standards, is “stimulating homebuyers and driving them into the run,” Kunisch said. safety and comfort of the rental market”.
The national average 30-year mortgage rate has dropped below 7% in the past few weeks. But the recent rate, at 6.78%, remains at “a high not seen since December 2001,”, he said. And lower domestic demand and strong US lumber imports have been a “combustible cocktail” for US lumber futures prices.
In October, US data showed that the number of multi-family housing starts fell 0.5%, while single-family projects fell 6.1%. Scott Reaves, managing director of forestry for Domain Timber Advisors, said multifamily constructions require less total lumber, and they also increase as a percentage of total residential construction, contributing to reducing the demand for sawn timber.
U.S. residency permits, which could underpin future home construction, hit a seasonally adjusted annual rate of 1.526 million in October, compared with 1.841 million in January.
Lumber could be the “economic focal point” for the US economy, said Kunisch, and its negative price performance this year could be a sign of a slowdown. The US economy grows at a 2.9% annual rate in the third quarter, after posting two consecutive quarterly declines.
Domain Timber Advisors expects a sawn timber demand fell about the next two years, Reaves said. Then demand may start to increase as the millennial generation comes of age to buy a home.
Even so, lumber is unlikely to return or sustain the high prices reached recently, Reaves said. Lumber futures prices hit a 2022 high of $1,477.40 in March, the highest level since May 2021, according to Dow Jones Market Data. The new lumber futures contract, which was launched in August and has a much smaller contract unit size, will eventually replace the old contract. It was trading at $532.50 on Nov.
In terms of supply, Reaves said there has been an increase in lumber production facilities across the United States. Higher production capacity could tighten the supply of logs over the next five years, which “booms good for forest land tenure,” he said. He said owners will have the flexibility to sell their trees when demand is high and cut sales when demand is weak.
The NCREIF Timberland Index, which includes 466 investment-grade timber properties, posted a return of nearly 2.4 percent in the third quarter, up from 1.9 percent in the same period last year.According to the National Council of Real Estate Investment Trusts.
Overall, however, lumber is facing obstacles related to demand while supply and imports continue to be met, said Kunisch of HTS Commodities. Whether imports are a function of a strong dollar or rebuilding depleted supply, “slowing demand and rising supply is not a positive combination” for lumber prices.