Lumber Prices and the US Housing Cycle

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Lumber Prices and the US Housing Cycle

Personal anecdote: about 15 years ago I (Nick) bought 40 acres of raw timberland in Maine at $1,000/acre. At the time I imagined doing a whole Walden Pond thing. Then I read that Thoreau actually had his mom do his laundry when he was supposedly sequestered in the wilderness. Disillusioned, I lost interest in the idea but kept the property. Bid-ask spreads on rural land are very wide indeed and comparable properties never rose in value.

Maybe now is the right time to sell, though, because lumber prices are at record highs. The Yahoo Finance chart below shows the long run record for lumber futures back to 2000. As you can see, there has been no cross-cycle inflation since at least then. (Hence the stagnant value of a 40 acres sans mule.)

At least cyclical peaks for lumber prices come when you think they should, like in 2004, 2013 and 2018, although (oddly) not in 2006-2007 during the height of the housing boom. I guess the mills had lead time to keep production high back then.

As odd as the spike on the extreme right side of that chart may look, think of it as the inverse of this year’s chart for crude oil, which went negative for a hot second on April 20th. Little oil demand during the national COVID shutdown and no place to store it caused a temporary but dramatic price dislocation. Lumber is seeing the opposite phenomenon. A rush of homeowners looking to upgrade their homes or even build new dwellings has drawn down inventory and pushed prices higher. Much, much higher.

All this got us to thinking about US home prices for two reasons. The first is that new construction uses a lot of lumber. In researching this topic, we found estimates of $35,000 to $55,000 in lumber costs to build a typical 2,000 square foot American home. That was when lumber was $350, though, not $800. The second reason is that US home price appreciation actually tracks those 2004/5 and 2013 peaks in the lumber price chart reasonably well.

Here is the year over year percentage change in the Case-Shiller Home Price Index back to 2001 so you can line it up with the lumber price chart:

What you’re seeing is, of course, more correlation than causation when it comes to the lumber/home price relationship but that’s no reason to discard the linkage. Demand for both stems from consumers’ interest in homebuying, building and remodeling. Yes, lumber costs will inform the cost of new houses, but existing home sales are more important to the direction of housing prices overall.

The bottom line here is that we would treat the spike in lumber prices as temporary (wood actually does grow on trees, after all) but expect US home prices to continue to climb. Between low mortgage rates and apartment dwellers looking for new accommodations, house demand looks strong through the rest of 2020 at least. If high lumber prices have any effect it will only be to temporarily slow the pace of some new construction, but that will only serve to elongate this particular upcycle in the home market. All this is a classic early cycle pattern, just turbocharged by COVID’s first shutting down lumber mills and then sparking demand for housing.