Lumber prices – is another surge on the way?

After grabbing headlines and spooking builders throughout much of this year and last, it seemed like lumber prices across North America had finally settled to a steady level – until the past few weeks.

Those prices took a nosedive in May after hitting a peak of over $1,700 (USD), a decline that was almost as dramatic as the massive spike they’d witnessed during the spring.

Since August, though, the lumber market appears to be stirring again, ominously around the same time of the year that prices began their precipitous climb in 2020.

With lumber futures hitting $628 per thousand board feet, prices have now increased by around 40% since the end of August, a climb that’s seen a rebound to near-pre-pandemic levels.

For the mortgage industry, the potential impact of that volatility is clear – particularly with price rises in the United States normally mirrored north of the border. David Clarke, owner at Clarke Mortgage Group TMG (pictured top), told Canadian Mortgage Professional that rising building costs were causing second thoughts among clients who had been considering taking out a construction mortgage.

“I’ve had clients that are actually preapproved for construction mortgages, but they’re in a holding pattern until the prices become better,” he said. “So, a dramatic increase in the cost of build is making people pause.”

Read more: Falling lumber prices and their impact on the mortgage industry

Russ Taylor (pictured below), a wood market consultant based in Vancouver, said that he had “never seen anything like” the last 18 rollercoaster months for lumber prices, with red-hot demand for the commodity colliding with constrained production at the beginning of the COVID-19 pandemic.

After those months of skyrocketing prices, he said, their ultimate decline proved equally unprecedented. “That advanced to numbers I never thought I’d ever see in my career – and then collapsed in three months back to where they started,” he said.

“That’s normally what we’d expect: when it goes up slowly, it comes down fast. We didn’t expect prices to come down quite as low as they did.”

While Taylor said that prices had risen dramatically since August, it was unlikely that a repeat of last year’s sudden spike was in the cards, with the current surge set to plateau at a more modest level than the last lumber boom.

“Prices are up, with a chance of doubling from late August anytime soon,” he said. “So, they’re roaring again, but we won’t see anything like we saw last year.”

That’s not to say that mortgage professionals with an eye on the lumber market and construction costs shouldn’t be braced for further eyewatering price increases. Taylor noted huge recent increases in the lumber futures market, traded on the Chicago mercantile exchange, which he said was an indicator of people putting money on lumber prices despite being thinly-traded.

“If you look at the Western SPF 2x4 [the benchmark softwood lumber commodity item], in late August it crashed to $385 per thousand board feet US, before the export tax. As of Tuesday [October 12] it was trading at $580,” he said.

“For lumber futures in mid-November, they’re trading for about $770-$780 – around another $200 higher. Normally, you don’t see those kinds of spreads in lumber futures.”

With futures for 2022 also currently sitting at high levels, Taylor said that was an indication that construction planning needed to take into account the likelihood that prices would continue to climb from their current levels.

Read more: What falling lumber prices mean for Canada’s housing market

“The overall demand looks pretty strong, so that’s fuelling this future potential of lumber prices going up,” he said. “They were cheap at the end of August – but they’re not going to be cheap for the next three, four, five months.”

Taylor predicted continuing high prices before the second quarter of next year, when a correction of some sorts was likely to take place – although he said it remained to be seen how far that correction would go.

Clarke said that while some clients might be deterred by rising construction costs as a result of higher lumber prices, many wouldn’t allow that to play a major role in influencing their goal of homeownership.

“The people that really seem to care about the cost of [materials], in my experience, are people that are doing it for business purposes or they’re not in a rush – they already have a place that they own, and they’re just waiting to build a house,” he said.

“The cost of lumber changing the construction prices – it’s not really deterring people from trying to buy. It just might mean that someone tries to buy something that already exists [instead]. The emotion of trying to find a home – that never goes away.”