Lumber falls to fresh 2022 lows as spike in mortgage rates cools housing demand and inflation puts dent in home renovations

• Lumber prices fell to fresh 2022 lows on Tuesday as rising interest rates and inflation cool down the housing market.
• Mortgage rates for the popular 30-year fixed remain above 5%, which has led to a slowdown in mortgage applications.
• Rising inflation put a dent in the home improvement market, weakening demand for lumber.

Lumber prices fell more than 6% to $829 per 1,000 board feet on Tuesday, representing a fresh lows for the commodity in 2022 as rising mortgage rates and higher prices take a bite out of the housing market.

The essential building commodity has seen a slow-down in demand thanks to the popular 30-year fixed mortgage rate surging above the 5% level. The average 30-year fixed mortgage rate was at 5.14% on Tuesday, up about 29 basis points from a week ago.

That surge in mortgage rates has made buying a home less affordable, and it led to a precipitous 40% decline in year-over-year mortgage applications earlier this month as consumers try to wait out for lower rates.

The decline in home buying activity due to higher mortgage rates, combined with a slow-down in DIY home renovations, has ultimately led to softening demand for the essential building commodity.

"Buyers remained cautious in light of heightened lumber prices, inflation concerns, and rising mortgage rates," Bank of America summarized in a note earlier this month, adding that "OSB prices were also lower again with buyers seeking discounts as demand from do-it-yourself was said to have slowed."

Meanwhile, capacity improvements in railroad availability, especially in western regions, have helped untangle a supply chain bottle neck that the lumber market was dealing with late last year, further easing supply pressures and helping lower prices, BofA observed.

Lumber prices are down 39% from their March high of $1,357 per thousand board feet, and are down 52% from its May 2021 peak of $1,733 per thousand board feet.

But that doesn't mean the commodity can't see a strong recovery and higher prices in the future given the ongoing shortage of new homes available for sale. According to data from Statista, the number of new homes built from 2010 to 2019 were less than half that were built from 2000 to 2009. And the number don't look encouraging for the start of the current decade.

That shortage of new homes built comes as the millennial generation graduates from student loan debt to mortgage debt, which should stimulate demand for new homes and could lead to a multi-year boom for new house builds, which would in-turn stimulate demand for lumber and lead to a continued increase in prices of the commodity.

But for now, the decline in lumber prices should help cool down inflation and give the Federal Reserve more breathing room as it starts to hike interest rates and reduce its balance sheet.