lumber prices have dropped by more than 60 so far this year but don’t count on a recovery soon higher interest rates and inflation will continue to slow demand for singlefamily homes “home builders have faced an enormous uptick in cancellations over the past several months due to the sharp rise in mortgage rates and the related softening demand for home buying” said alexander snyder portfolio manager real estate securities at centersquare investment management “the trickle down of higher rates is cascading into lower demand for new houses which leads to lower demand for lumber which leads to lower prices for lumber” the mostactive november futures contract for random length lumber lbx22 lb00 settled at 41080 per thousand board feet on sept 26 that is the lowest settlement since june 2020 and prices are down 64 year to date according to dow jones market data prices have lost around 75 from the peak price during the covid19 pandemic of 167050 on may 7 2021 the federal reserve last week agreed on another jumbosized interestrate hike the central bank also predicted its benchmark shortterm rate would climb to as high as 475 in 2023 and perhaps go even higher amid its efforts to ease inflation “i wish there was a painless way to do that” fed chairman jerome powell said after the announcement of the latest rate hike on sept 21 “there isn’t” since powell’s comments “markets have moved to complete capitulation mode and lumber is no exception” said kyle little chief operating officer of sherwood lumber however lumber is likely to “overcorrect to confirm the end of the most recent cycle in the next 30 days” he said sherwood lumber sees a “sideways to steady higher move in lumber prices as supply continues to adjust lower to meet slower demand along with interest rate increases dissipating and levelling out over the next three quarters” little said housing demand meanwhile hasn’t fared well against a backdrop of rising rates “lumber has witnessed complete demand destruction from a housing standpoint” said greg kuta president and ceo of lumber broker westline capital strategies it has been a “onetwo gut punch” in the form of demand destruction with every kind of ratchet higher in interest rates when you factor in higher inflation price appreciation over the past year and higher interest rates “the single family component of housing is getting annihilated” he said there is still a housing shortage but you’re seeing a “transfer” away from singlefamily homes into multifamily homes which don’t require nearly as much “consumption of dimensional framing lumber” as singlefamily homes said kuta construction on new us homes also known as housing starts has fallen sharply in recent months posting declines of 109 each in june and july according to data from the commerce department housing starts in august however climbed by seasonally adjusted 122 to 158 million on the back of a rise in new apartment construction homes are “still highly expensive for first time home buyers” said kuta he roughly estimates that average mortgage payments are somewhere around 1800 to 1900 a month while the cost of renting is somewhere in the range of 1100 to 1200 “you’re seeing demand for housing it’s just shifting into the multifamily component now at the detriment of singlefamily homes” he said kuta also believes that demand is no longer going to be the “savior” for the lumber market “it’s going to be supply constraints” and the supply side of the lumber market is likely to be more “reactionary” with producers taking production off the market when needed he said lumber is “definitely a strong precursor of what’s to come for sure” for the economic outlook “all commodities including lumber are going to continue to come under pressure” he said read lumber plays ‘canary in the coal mine’ cues downturn in commodities meanwhile the launch last month of a new lumber futures contract has seen a slow start “like herd of turtles” said kuta the sizing of the new contract is at 27500 board feet a fourth the size of the legacy contracts the last listed contract for the legacy contract is may 2023 so between now and year end into the first quarter of next year there is likely to be a “massive transfer” from the legacy contract to the new contract kuta says there are “bigger than better things” in store for lumber from a liquidity standpoint he says looking ahead however there are just “too many headwinds facing lumber” said kuta the downside for prices is probably somewhere in the 400 to 350 area he said the market is going to struggle to get back to 550 to 600 unless there is some sort of supply constraint event or shock to the market