Here’s why decline in lumber prices doesn’t equate to low housing prices
- After its all-time high of $1,733.50 in mid-May, lumber prices have since declined by about 65%.
- On Wednesday, lumber prices dropped by 5.83% to erase the year's gains.
- Decline in lumber prices may not necessarily yield a drop in new houses' asking prices.
Lumber prices have erased all the gains from earlier in the year as the supply chain continues to normalize. Earlier in the year, the commodity’s price surged by more than four times its cost in 2020. It hit an all-time of $1,733.50 per a thousand-foot board.
The prior surge in lumber prices was at the center of the discussion on rising inflation. As such the current decline has helped alleviate investors’ concerns about runaway inflation. In mid-June, the Fed Chair, Jerome Powell cited lumber price movements to substantiate the observed inflation is transitory. In his view, fading of the government’s stimulus package, and normalization of the commodity’s supply chain, would inevitably result in the prices returning to the pre-pandemic levels.
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While that is true, it may not necessarily result in a decline in house prices. A rise in the cost of raw materials pushed homebuilders to pass on the expenses to the buyers. However, they may not be willing to lower the asking price as lumber prices reduce.
According to Lennar Corp.’s CEO, Jon Jaffe, homebuilders are saving around $1,700 on building costs for every 10% decline in lumber prices. Nonetheless, depending on the competitiveness in the housing market, the companies are likely to focus on collecting higher profit margins as opposed to lowering the asking prices.
As construction slows down in autumn, investors will be keen on whether the commodity’s cost continues to fall. Subsequently, it will be interesting to see how the price movements impact the US housing industry.
Lumber prices technical analysis
Lumber prices have extended their losses from the previous session as the downward momentum remains. At the time of writing, the Random Length Lumber Futures for the current contract were down by 5.83% at 612.0. Over the past week, the prices have dropped by about 30.11%. Since its all-time high in mid-May, it has declined by about 65.18%.
On a two-hour chart, it is trading below the 25 and 50-day exponential moving averages. With an RSI of 19, it is squarely in the oversold territory. Based on both the fundamentals and technicals, the bears are in control of the market.
I expect lumber prices to make a corrective rebound before falling further. It is likely to rise to the prior support level of 712.9, which is along the 25-day EMA. Past its current support level of 600, the bears will be targeting the prior support level of 524.9 and October lows of 450.