- Lumber prices extended their 2-day decline to 10% after the Fed hiked interest rates by 75 basis points on Wednesday.
- The aggressive interest rate hike from the Fed helped solidify the recent surge in mortgage rates to above 6%.
- "The lumber market continues to be in a state of overall malaise as buyers anticipate lower overall demand going forward," Sherwood Lumber told Insider.
Lumber prices fell 6% on Thursday, extending their two-day decline to 10% after the Federal Reserve hiked interest rates by another 75 basis points.
The aggressive interest rate hikes from the Fed have helped solidify the ongoing surge in mortgage rates, which jumped above 6% for the first time since 2008 earlier this month and have doubled over the past year. On Thursday, the average 30-year fixed mortgage rate surged another 27 basis points from last week to 6.29%, according to data from Freddie Mac.
The surge in mortgage rates have taken a significant bite out of home sales, which has in-turn led to price cuts and has dented homebuilder sentiment.
"The lumber market continues to be in a state of overall malaise as buyers anticipate lower overall demand going forward. Many yards are trying to pare their inventories to minimum levels and have really no fear of price upside," Sherwood Lumber's director of risk management Steve Loebner told Insider.
"This has taken all of the urgency of the past two years out of the market. We have had a few supply and transportation scares which caused short term rallies, however these have all been quickly shrugged off. Home prices are resetting to reflect the higher mortgage rates and this is a process which can take some time," Loebner said.
But the housing market hasn't completely fallen apart, and after a more than 70% decline from its record high, lumber prices can still catch a bid going forward.
"There is still a solid backlog of demand on existing single and multi-family [housing] projects… Multi-family demand in particular has been very robust and many traders report near record backlogs of projects on the books which will be starting over the next few quarters. We have also started to see some modest [lumber] production curtailments, which over time will become more prevalent if pricing remains depressed," Loebner said.
Steady demand for the essential building commodity, combined with declining supply due to potential production curtailments could ultimately spell upside for lumber in the future, at least as long as demand holds up.
"We are in for a slower grind and a more challenging market environment. However with many of the benchmark commodity lumber items already down approximately 70% from their levels earlier this year, the pervasive bearish sentiment, and the likelihood of less supply, traders would be well advised to consider the risk/reward of being overly negative at this point," Loebner concluded.