Could the Price for New Homes Be Coming Down?

If the price of lumber is a leading indicator, the cost of new home construction might be coming down. Or at least seeing some relief from rising costs. Lumber prices have fallen 47% year to date. But that isn’t the big news. The bigger news is that prices are down 65% from a 2021 record high of $1,733 per thousand board feet. In late May, lumber price futures stood at $651 per thousand board feet.

That is particularly good news at a time when home affordability is the primary challenge to homeownership. Volatile swings in lumber prices over the past year alone have pushed the average price of a new single-family home up more than $18,600, according to the National Association of Homebuilders. At this time, when interest rates of around 5% have become the main obstacle to home ownership, lower lumber prices should help ease inflationary pressures in the housing market.

Better yet, lumber prices are expected to go lower according to experts. A backlog of orders remains and there are still supply chain issues propping up lumber prices. But when these issues are resolved, strong demand for new houses will keep the bottom from falling out of the lumber market. Towards late summer and going into the fall, lumber prices are expected to move lower and stabilize at between $450 to $600 per thousand board feet.

It all comes down to supply and demand. Over the past two years or more, the supply of lumber took multiple major hits. The main four were COVID work stoppages, flooding in lumber-producing British Columbia, a bad wildfire season in the Pacific Northwest, and an overstrained transportation system. The low supply was exasperated by the high demand. The high demand for new housing has been well known for several years. Low-interest rates also brought an avalanche of refinancing activity with high demand for remodeling materials. It was a perfect storm to run up lumber costs.

Rising interest rates are now taking a toll on the demand for lumber. Recent headlines show a slow but steady decline of buyers in the housing market as higher interest adds to the affordability problem. Higher interest also means the refinancing activity has dropped substantially which means much less home remodeling. Now, the fear of a recession slowing the economy is becoming dominant news. It all adds up to a significant decline in demand for lumber while the supply is on the upswing.

The mills are still filling long outstanding orders for lumber at the inflated prices, but these will soon wrap up. Even today’s prices at $651 per thousand board feet can be expected to go lower. It will take a few weeks for the lower prices to work through the supply chain but in a month or so, both consumers and contractors can expect major price relief at neighborhood lumber yards and big-box home improvement retailers.

Still, home buyers should not wait in anticipation that home prices will drop. The housing market can be described as operating without brakes. The housing market, in general, has been and continues to be driven by its own supply-demand imbalance. That dynamic isn’t going away any time soon. The lumber supply may be returning to normal but not the supply of houses. Millennials turning age 33 is moving towards its peak. This is the age when most buyers purchase their first home. The reality is that home price appreciation has accelerated at the beginning of 2022, mainly due to the fear that interest rates will continue to rise. That wave will soon be over as several more rate hikes kick in. Demand will slow but is not going to go away. Lower lumber prices will help with new home construction, which will help supply more houses. Millions of new homes will eventually help balance supply with demand for homes. But builders cannot build millions of new homes in a couple of months. It will take a couple of years for home supply to catch up with home demand. A lot can happen with the economy in two years.

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