2020 Mid-Year Lumber Market Report
The 2020 lumber market has had three distinct movements over the first 26 weeks of the year. In the first nine weeks, we experienced a rising market. Over the next 6 weeks, the market gave back those gains. And for the past 11 weeks, the lumber market has had steady increases that have pushed Contract Lumber’s Commodity Lumber Price Index above the $400 plateau for the first time in 81 weeks. You’d have to travel back to September 2018, to find the last time our index topped $400. In contrast, 2018 had 35 straight weeks where our index printed over $400 (8 weeks over $500). The market spent the last quarter of 2018, and all of 2019, hovering around the $300 level. The lumber market traded in a very narrow range all of last year. Then we turned the calendar to a new decade, and things changed.
Housing activity coming out of 2019 was ramping up. Single-family starts in December were at their highest level since the great recession, over one million units. Multi-Family and Single Family combined housing starts posted 1,617,000 units – seasonal annual adjusted rate (SAAR) – in January, again, the highest level since 2007. February recorded another million-plus single-family starts, the third highest combined starts total since the housing meltdown. Housing had experienced their best three month cycle in well over a decade, and demand for lumber was uncharacteristically strong, especially for that early in the year. Now it’s not unusual for lumber dealers to load up on inventory during the winter in anticipation of the spring building season ramping up, but wood was hitting the jobsites at a breakneck pace. A mild winter was especially helpful in ratcheting up the pace of lumber consumption.
Lumber producers were unprepared for this early onslaught of buying. Demand outpaced supply and prices where grinding upward. For the first nine weeks of 2020, our index prices climbed from $315 to $379, a jump of over 20%. Studs, 2 x 10 Southern Yellow Pine, and OSB all spiked over 30%. The housing and lumber markets were hot, and there appeared to be no relief in sight. Little did we know what was lurking around the corner.
No one was prepared for what would transpire over the next six weeks. It was as if a giant tsunami had swept over our world. The tidal wave came in the form of a global coronavirus pandemic, eventually named COVID-19 by the World Health Organization (WHO). While this public health crisis has had far-reaching impacts on us all, many of which are still developing, it initially rocked the construction world like a wrecking ball. After shelter-in-place orders began and businesses shuttered, the unemployment rate spiked. By the end of April more than 23 million Americans were out of work. Pending home sales tumbled by over 20% in March, and panic crept into housing’s consciousness.
During that 6-week period, lumber prices receded quickly. Beginning in March, and continuing until April 10th, Contract Lumber’s commodity index dropped $78, or just shy of 21%. Essentially, the market had shrunk back to where it started the year on the uncertainties that surrounded this new public health crisis.
The collapse in lumber demand from the sharp drop in new residential construction prompted a massive wave of curtailments from wood products producers. Approximately 30% of North American lumber production capacity (over a billion board feet) was idled in April based on estimates, but some believe the figure was actually much higher given the tight-lipped nature of many producers. The quick response by the industry seemed warranted at the time to prevent supply from overwhelming demand.
With the exception of New York, New Jersey, Michigan, and certain areas of Northern California, Washington, and Oregon, construction was deemed an essential business by mid-March. This meant that construction projects could proceed as long as they practiced CDC guidelines. Lumber companies were an obvious benefactor of that order and all Contract Lumber locations were allowed to continue our supply and construction services. We, like most lumber concerns throughout the country, were extremely busy. The storm clouds on the horizon passed us with nary a drop of precipitation.
Lumber consumption, after taking a bit of a pause due to the perceived storm threat, resumed in earnest by mid-April. Much of the lumber pipeline focused on drawing down inventories in anticipation of a massive drop in demand due to the pandemic, but the fallout never really materialized. In fact, there was new-found demand coming from the DIY sector due a multitude of home improvement projects being tackled by the shelter-in-place crowd. The robust demand caught sawmills, secondary supply sources, and dealers (pro and consumer), by surprise. The result left buyers scrambling for coverage to meet immediate needs, and lumber prices rallying hard. The strength in pricing reflects the confluence of heavily curtailed lumber production capacity in April, combined with much better than expected demand in May.
Over the past 10-weeks, our commodity index (designed to closely mirror specific lumber product usage in an average structure), jumped by nearly 35% and has hurdled the aforementioned $400 plateau in the process. The southern pine market has been particularly active with 2 x 8” vaulting 74% and 2 x 10” increasing by 56%. Studs and the dimensional spruce market swelled by over 30%. Given that most producers are currently reporting 30-plus day order files, there is very little near-term downside risk to lumber prices right now. We fully expect the market to continue its climb. How high, and how long, will depend on two things – how quickly will we see a sustained supply response to bring idled capacity back online, and will housing demand hold through the summer. Oh, and there is a third thing. Will a COVID-19 relapse force states to once again place restrictions on their citizens and businesses.
In another surprise development, housing starts bounced back by 4.3% in May, according to the Census Bureau and Department of Housing and Urban Development. The SAAR for May was 974,000 units with the multi-family sector driving most of the growth. May’s housing permit data was even more encouraging with overall housing unit authorizations at 1,220,000, up over 14% above April. The number of permitted single-family units not yet started is at its second highest level since 2008. Given considerable pent-up demand according to demographics, and with record low mortgage interest rates, there seems to be moderate tailwinds for the housing market.
That does not mean that we are completely in the clear. The atmosphere is still soupy, and pop-up storms are still in the forecast. To quote the famous orator, Donald Rumsfeld, “we don’t know what we don’t know.” I couldn’t agree more. But our industry has dodged a major storm for the time being. So much of the housing industry’s success depends on overall positive economic conditions, and consumer confidence. We should all feel pretty good that both are heading in the right direction right now.