Why declining lumber prices aren't likely to help home prices

The price of lumber jumped over the past few years, thanks to snarled supply chains and surging demand. Now, it’s way down compared to last year. However, that likely won’t mean lower prices for new homes.

Relatively speaking, it’s much cheaper to buy lumber now than it was a year ago. But that’s compared to an unprecedented price spike, said Crystal Gauvin, a senior economist at Forest Economic Advisors.

“As an economist, it ruined our graphs, because you have what historically was a lot of volatility just got blown out the window and looks like a straight line now,” she said.

But that’s not likely to bring down the cost of new homes, according to Gauvin, due mostly to the high cost of pretty much everything else.

“We see that in electrical and plumbing and concrete and sheetrock and roofing,” said Bart Frisbie, president of the contracting firm Sterling Homes in South Burlington, Vermont. “While lumber has receded, and that is extremely helpful, many of those other costs have not and probably never will,” he said.

One big factor, Frisbie said, is labor. Companies that supply him with all those other materials are still having trouble finding enough workers.

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So are lumber prices going down in 2023?

Maybe. Renewed demand is encouraging, but it is only one part of the equation. 

One significant unknown in predictions for next year’s lumber prices are the actions, or lack thereof, of the Federal Reserve. It is possible that the Fed may become over-enthusiastic in its anti-inflation efforts and raise interest rates higher than is necessary to combat inflation. Should that happen, the economy may be in worse shape than predicted in 2023. This could produce the same sluggish housing market and correspondingly low demand for lumber that we saw in early 2022, resulting in similar or falling lumber prices compared to today’s rates.

The other major unknown is lumber supply, which may not be as stable as one would hope in 2023.

The war in Ukraine and the resulting sanctions against Russia and its friends will likely mean a global shortage of lumber; Russia and its ally Belarus together account for a weighty 12.2% of the global exports of lumber. The lasting effects of pandemic-related supply chain issues also continue to ripple out across 2022, 2023 and likely beyond. In combination with the forecasted bounce-back in the U.S. housing market, this reduced supply would drive lumber prices higher than their current rate, not lower. 

However, Simonson experts believe that the Russian lumber market will have a larger effect on specialty lumber products than on the housing market’s standard SPF (spruce-pine-fir) supply, and therefore the impact on costs may be lessened for those hoping to build in 2023. 

When will lumber prices go down in 2023, if at all?

Historically, lumber prices start to fall around Labor Day and continue to drop throughout the fall, reaching their annual low around Thanksgiving. But the biggest wild card in predicting whether lumber prices will drop in 2023 is the Federal Reserve. The Fed’s actions in early 2023 will likely be a critical factor in lumber prices for the rest of the year. 

As discussed above, it is possible that the Fed will overshoot on interest rates and grind the housing market to a stand-still, making it probable that lumber prices will fall sometime around Summer 2023. Should the Fed decide against raising interest rates again, it may be more likely that a rebounding housing market will cause lumber prices to be driven up—or at the very least, remain relatively stable.

The bottom line

No one can say with 100% certainty whether lumber prices will go down, but experts are keeping an eye on the major contributing factors and can make educated forecasts. Assuming that the U.S. housing market experiences the bounce-back many economists are predicting for 2023, the anticipated lumber price rally will likely be followed by a drop due to factors like increased interest rates and push-back on supply. Simonson’s lumber experts say they’re anticipating lower overall numbers compared to mid-pandemic prices, but do not foresee 2023 prices dipping lower than what we are seeing at the end of 2022.