Lumber prices defy the most recent surge in mortgage rates to extend 3-day rally to 10%
- Lumber prices staged a 3-day rally of 10% despite continued headwinds in the housing market.
- The average 30-year mortgage rate closed in on 6% this week, hitting its highest level since 2008.
- Homebuilders continue to see a slow-down in demand, which doesn't bode well for lumber.
Lumber prices broke a three-week losing streak and edged higher on Friday, extending its three-day rally to as much as 10% at $506 per thousand board feet.
The gains come despite continued headwinds in the housing market, particularly a surge in mortgage rates. to their highest levels in over a decade.
The average 30-year fixed mortgage rate surged to 5.89% this week, according to data from Freddie Mac. The surge to nearly 6% represents the highest level since 2008, in the midst of the housing market collapse.
And those higher mortgage rates are leading to lower demand in the housing market, according to home builders across the country, which ultimately translates into lower demand for lumber.
"If interest rates get to 6.5% the waters will get very choppy," a Tampa home builder told John Burns Real Estate Consulting in its August survey. Another builder in Harrisburg said it saw a big uptick in buying activity when mortgage rates briefly dipped in early August to 5%, signaling how strongly correlated mortgage rates are to home sales.
"August was a very poor month for sales across the board. Cancellations spiked from July and buyers showed no sense of urgency," an Austin home builder told John Burns Real Estate Consulting.
The pain could continue in the housing market, and therefore the lumber market, if the Federal Reserve moves forward with a widely expected 75 basis point interest rate hikes at its FOMC meeting later this month.
There has been little lag between mortgage rates and a hike in the Federal Funds Rate, as has been seen when the Fed first began raising rates in March, precisely when mortgage rates also began to soar. But if inflation continues to cool down as some Wall Street strategists expect, a Fed pivot may be right around the corner, limiting further rate hikes and therefore capping the rise in mortgage rates.
That could lead to a resurgence in the housing market, thus aiding the price of lumber. If not, lumber prices could return to its pre-pandemic trading range of between $200 and $600 per thousand board feet.
One upshot of a slowing housing market is that input supplies, including lumber, are able to catch up to demand as supply chain disruptions begin to work themselves out. "A slowdown in sales helped to relieve the pressure on labor and supply issues," a Philadelphia home builder told John Burns Real Estate Consulting.
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