Lumber prices have slumped amid climbing mortgage rates, but 2 experts say the commodity may rebound 13% on tight supply

• Lumber prices are down more than 20% this year but are poised to gain upward traction, experts told Insider.
• Futures pricing for lumber suggest demand is building up for summertime projects.

The scorching rise in lumber prices last year hasn't been able to continue in 2022, but this year still holds the potential to see prices rise back to the $1,000 mark as demand for the building material perks up within a tight supply market, experts tell Insider.

There's been a 23% drop in spot lumber prices so far this year, falling to $882 per 1,000 board feet as of Thursday. Prices have softened as higher interest rates cool a red-hot housing market. The pullback follows a massive rally last year that pushed lumber to a high of $1,733 in May before settling up by more than 30% last year.

"We've been expecting for a while now a normalization around lumber prices. There was a lot of volatility as we moved through the pandemic and the surge in demand, coupled with very real supply-side constraints, drove lumber prices to the highs they ended up at," Scott Reaves, director of forest operations at Domain Timber Advisors, told Insider. Domain Timber is a timberland investment management firm with $585 million in assets under management.

"We expect to see that normalizing over the course of this year, somewhere in the $600-$1000 range," or slightly above, said Reaves.

Demand for lumber "is not growing as fast as it maybe was during the pandemic, and higher interest rates "certainly puts a chilling effect on things," he said. "But we don't expect that to fully curtail the housing market in any way. I think there are a lot of demographic factors that still support strong housing over the next few years."

The popular 30-year fixed mortgage rate recently pushed above 5% for the first time in 11 years, with rates rising as the Federal Reserve embarks on what's expected to be a long cycle of interest rate increases meant to fight inflation. With borrowing costs picking up throughout 2022, sales of new homes in February dropped 6.2% from the year-ago period.

The lower demand for housing could spill into demand for new construction next year, keeping downward pressure on lumber prices, according to ING Economics.

"There are a lot of moving parts in the lumber market right now. There's obviously concern about mortgage rates going up. And if so, is that going to finally start to slow this housing boom that has been pushing lumber, copper, and so many other markets higher? It's certainly a possibility," Darin Newsom, president of commodities analysis firm Darin Newsom Analysis, told Insider.

In looking at future pricing for lumber, Newsom said he's seeing price inversion. "What that tells me is there's still a long-term, bullish supply-demand situation in lumber," he said. He said the July contract for lumber this week fell to $759 per 1,000 board feet from a high of $1,204.

"If we get some sort of reversal here in the spring, I think this summer we should be able to get back up into the upper-$900 area" to as high as $1,035.

But Newsom doesn't expect to see prices pushing much past $1,000 nor soon returning to May 2021 highs.

"We will start to feel the effects of the higher interest rates as we're expecting month-to-month interest rate increases," from the Fed. Discretionary spending should also come down and those mix of factors will weigh once again on home building and lumber prices.

Reaves at Domain Timber sees the potential for lumber prices to increase toward the end of the year as businesses and homebuyers start planning for next's building and home improvement activities.

"With home renovations specifically, there are other maybe financial products that people could choose - home equity lines of credit or even use cash reserves they've stored up over the pandemic. I think those factors will help mute any chilling effect that a rate increase will have."