ARIZONA - The homebuilding business looks like it’s ticking up again after a disappointing 2022. As a result, investors see a promising sign for lumber prices. According to The Barron's Daily, an increase in demand for lumber in the next few months follows seasonal increases in home buying in the spring.
Lumber was among 2022’s worst performing commodities and continued that trend in the early days of 2023. The Federal Reserve’s commitment to combat inflation combined with waning confidence in the U.S. housing market has scared off would-be home buyers. Without home buyers, the demand for home construction flatlines and as goes housing demand, so goes lumber.
Home construction is inextricably linked to lumber demand and prices, so a drop in the rate of construction can generally be expected to mean a fall in lumber prices. That can spell uncertainty for home renovations, which by extension, impact the demand for products linked to lumber, including wood countertops, cabinets, flooring and furniture.
However, the dip in the construction rate may be nearing its end. Sentiment among homebuilders has ticked up lately meaning residential construction companies likely see more business in the coming months. In fact, the National Association of Home Builders (NAHB) Housing Market Index (HMI) rose to 35 in January from 33 in December. That increase comes after the index fell every month since December 2021.
The Fed announced a quarter-percentage-point interest-rate hike on Feb. 1, the smallest in a year. If buyers increase demand for new-home construction as the Fed slows raising the overnight lending rate, it’s possible to see an increase in lumber demand. Analysts agree, “The lumber market has likely made a major low and can trend substantially higher over the next year.” writes Shawn Hackett, president of Hackett Financial Advisors. In addition to U.S. housing activity, the reopening of China will likely add some lumber demand, Hackett says.
However, not all signs seem positive. West Fraser Timber Co. (WFG) has reported a fourth-quarter loss of $94 million U.S. due to weak demand for lumber products amid the slowdown in the North American housing market. The Vancouver-based company said that the Q4 loss represented a decline of 128% compared with earnings of $334 million U.S. during the same period of 2021.
The year is still young and there are a multitude of uncertainties regarding the housing market and the Fed, which will have a direct impact on the lumber market. Time will certainly tell. But right now, there appears to be a spark of hope for a return to seasonal housing demand and by extension, a rebound for lumber prices.
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