- Wood prices continued their downward trend Wednesday, falling 5% to a new 2022 low of $495 per thousand feet of board.
- The liquidation took place as construction companies adjust to the new reality of a real estate market that is “returning to normal”.
- “The last two years are going to be atypical in terms of [home] price goes,” said Eric Lipar, CEO of LGI Homes.
Wood prices continued to decline Wednesday, falling as much as 5% to a new 2022 low of $495 per 1,000 feet of board.
Essential construction merchandise has gone on a wild ride since the start of the COVID-19 pandemic, with prices hitting a record $1,733 per 1,000 feet of board as demand for homes soars and supply chain snags. plagued sawmills across Canada.
But since the lumber peak in May 2021, it has been nothing but a slump for the commodity, with a decline of 71%. Weakness accelerated in 2022 as higher mortgage rates helped to cool the booming housing market, which fueled demand for wood as homebuilders sought to cash in on rising demand.
“The past couple of years, it’s been an unbelievable market where every builder is taking orders, everyone is having phenomenal success, everyone is having phenomenal margins,” said LGI Homes CEO Eric Lipar on the company’s earnings call. on Tuesday.
LGI Homes is a builder of single-family homes in the western and southeastern states and has benefited from higher margins amid the COVID-19-induced housing demand boom. But those margins are not sustainable as demand for real estate cools and prices show signs of falling in some markets.
“We will normalize our prices. Yes, we will probably sell the same plants in the future for less money than the last 24 months. [home] price goes,” Lipar said.
This is good news for new homebuyers who have been pushed out of the market due to rising home prices and the limited supply of properties for sale. The recent rise in mortgage rates hasn’t helped affordability, but the average 30-year fixed mortgage rate is down more than 50 basis points from its peak in June, offering some relief.
The decline in wood prices also reinforces the view that, based on it and other commodity prices that have fallen in recent months, inflation may finally be easing, something both the Fed and consumers are looking forward to.
Ultimately, the housing market is getting back to normal, and that means lumber prices will likely remain in the normal trading range before 2020 of $200 to $600 per thousand feet of board.
“An adjusted gross margin of 33%, it’s very unlikely that we’ll ever publish that again in our history. It’s such an atypical gross margin. And we’re getting back to normal,” Lipar said.