Key learning points
- The price of wood affects many industries, from construction to transportation. When the real estate market cools, fewer people spend on home improvements and home construction, meaning less demand for wood.
- Wood suppliers were unable to keep up with unique demand in 2021 due to supply chain issues and labor shortages. As a result, wood prices rose.
- With the Fed raising interest rates, the entire economy is slowing, affecting everything from real estate to discretionary spending. This means that people are not as eager to spend money on home improvements as they were in 2021.
The pandemic saw many unique shifts in consumer spending patterns as people were stuck at home looking for things to do. Many people turned to unfinished DIY projects around the house as something to keep themselves busy with. The real estate market also started to heat up as interest rates were low and people wanted to move because many jobs were moving far away.
As a result of this increased demand for home improvement and real estate, the price of wood went up. The timber industry misunderstood the original pandemic demand and was not ready for the boom. Instead of increasing production during lockdowns, many companies in the timber industry slowed down and even took some downtime. This led to supply chain issues as people couldn’t get their hands on wood fast enough when they were ready to start those DIY projects.
Let’s take a look at wood prices during the pandemic and now, as well as which industries have been most affected by the fluctuating cost of this commodity over a confusing two-year period.
What is happening with the price of wood right now?
If you look at the chart for the price of wood, you will see that this commodity is plummeting from its record highs just a year ago.
What exactly happened to the wood price?
The DIY industry has experienced a unique pandemic boom
The price of wood has seen some wild swings since the start of the pandemic in 2020. Initially, the wood industry misunderstood the economic situation by slowing down production. They were unprepared for the boom in home sales and home renovations. The DIY industry saw people spend their time on projects in and around the home because they couldn’t spend money on going out or traveling for a while. This meant discretionary spending shifted to home improvement retailers.
The wood industry couldn’t keep up with demand
The industry experienced a unique situation with regard to supply and demand. Supply chain problems caused by the pandemic, labor shortages and increased consumer demand caused the price of wood to skyrocket in 2021. The price of wood reached $1,515 per thousand board feet in the spring of 2021. This was a huge increase for timber buyers who were used to paying anywhere from $350 to $500 before the pandemic.
Interest rate hikes slow down the real estate market
With interest rates rising, the real estate market is cooling off from its pandemic highs. New home construction has slowed as the number of new homes under construction fell by 9.6% in July. Since wood is mainly used for framing and finishing (walls, floors, panels and window frames), the product is not needed when real estate construction cools.
Consumer spending patterns are changing
Consumers went from working on projects around the house to spending more money on going out and entertainment as pandemic restrictions eased across the country. People spend less of their discretionary money on improving their homes as life returns to normal. This leads to a natural decrease in the demand for wood.
What is the price of wood now?
At the close on Sept. 14, the timber price was $511 per thousand plank feet, down $56 from the previous day’s closing price. To put things in perspective, the price of wood hit an all-time high of over $1,700 in May 2021. The price of wood has fallen by about 54% since the beginning of the year.
Wood prices are directly linked to news of interest rate hikes and an economic slowdown. As frustrating inflation news hits the media, we’ve seen a decline in equity markets and a decline in consumer confidence.
A strike by the railway workers would also have increased the volatility of the price of wood, as this raw material relies on rail freight transport. This possible strike would have been the first major railway strike in 30 years and would cause serious supply chain disruptions for the timber industry, pushing prices down. Positive news: It looks like a potential strike has been averted with a tentative deal. We have to wait and see how the negotiations go.
Which Industries Are Most Affected by Wood Prices?
Wood prices have an impact on many industries, both directly and indirectly, as this raw material is used for various reasons.
These are the industries most affected by timber prices.
The housing market relies on this important building material to build new homes. When timber prices rose, construction companies charged more for each project. Due to these price increases (together with higher mortgage interest rates), the demand for new-build homes fell. In disappointing news, the number of new homes (or new homes under construction) fell by 9.6% in July 2022 alone. The lackluster numbers for new home construction coincide with the new decline in timber prices.
Mortgage rates are strongly linked to all other costs associated with housing costs. Data from the Mortgage Bankers Association shows that the interest rate on a 30-year mortgage rose to 6.01% for the week ended September 9, 2022. This is an increase of 7 basis points from a week earlier . This interest rate hike immediately led to a sharp fall in the wood price, as fewer people apply for mortgages on new construction or transfer mortgages to work on home improvement projects.
Expensive mills have to balance the fall in demand for wood with production. So when lumber prices fluctuate, sawmills sense it naturally as they have to try to keep up with market demand. When the pandemic started, labor shortages and supply chain problems affected the distribution of timber. Because you can’t surrender an additional commercial sawmill in the short term as more orders come in, the increased demand can literally put you on hold.
As construction projects skyrocketed and timber supply and processing failed to keep up with shocking demand, timber prices rose, triggering an increase in sawmill production. Sawmills tried to capitalize on the higher prices by ramping up production to increase profits, but this only led to a drop in timber prices as demand was gone.
Wood prices are now falling due to lower demand, so sawmills need to plan accordingly.
Freight and transportation
Wood is somewhat versatile because it can be transported in a variety of ways, from truck to rail. When the price of wood fluctuates, the transport sector feels it. In recent years, there have been times when transport has not been able to keep up with demand. As demand decreases, this means less work in freight and transportation. The jury is still out on whether this is a return to normalcy or a genuine economic slowdown. We’ll have to wait and see how the economy reacts to continued rate hikes.
Home improvement retailers
Retailers such as Lowes and Home Depot are feeling the impact when it comes to timber prices, as they rely on consumers engaged in DIY home improvement projects. With high interest rates and a decline in discretionary spending, fewer people are looking for wood. If the price of wood falls, it means less revenue for the retailers.
What does the future hold for wood prices?
When the cost of borrowing money rises to slow inflation, wood is a commodity that is negatively affected. Wood-bound industries suffer together as demand slumps. As the housing market cools, fewer new homes are built and fewer people engage in home improvement and repair projects. Someone looking to buy a refurbishment home may not be so inclined to do so when interest rates rise. A property that may have seemed like a worthwhile investment last year isn’t as attractive with higher interest rates and a larger monthly mortgage payment.
As you can imagine, people are also less likely to borrow money to do home renovations when interest rates rise. Homeowners often dive into their home equity by refinancing their mortgage or taking out an equity loan to access money to work on home renovations. This isn’t as common when mortgage rates go through the roof, as homeowners will question the idea of adding that deck or eventually finishing the basement when interest rates are high.
Wood prices have experienced extreme fluctuations in recent years, as demand increased and decreased drastically. Some experts predict that wood price volatility should decrease as we return to a normal market. Others fear that a looming recession in the housing market will severely damage demand for wood and other related products.
How do you invest when timber prices experience extreme fluctuations?
The real estate market affects many stocks, so as you work on your investment portfolio, pay attention to your exposure to the housing market as the economy cools. If you decide not to invest in physical real estate because of the high interest rates, you have other options. Q.ai offers investment kits with built-in REITs and other real estate holdings. If you are concerned about market volatility, you can activate Portfolio Protection to protect your gains and reduce your losses, no matter what industry you invest in.
The price of wood is worth the time and attention it takes to check as it is strongly linked to the real estate market. The labor market suffers as the economy slows, leading to less consumer spending on discretionary items such as home improvement projects. As the Fed continues to raise interest rates to fight inflation, it will be remarkable how the housing market reacts.
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