Advantageous Purchase Window Forecast Earns More Support-Updated
Nearly 3 months ago, we provided discussion of a likely advantageous purchase window which addressed home prices, home availability, the mortgage market and the factors driving home prices. As additional support for moderation in the home price increases, April has reinforced the materials price factors raising prices for home builders and either hurting builders’ profits or pushing new home prices higher. At the time of our post, lumber prices had tripled from a year earlier, adding an additional $25,000 to $35,000 to a typical new home price. After a brief retreat, the lumber prices jumped again and are now quadruple year earlier. May Update: lumber prices continue to rise, and are now 4-5 times higher than last year. New homes started will have to deal with a penalty of at least $30,000 to $40,000 per home. Not a good omen for builder volumes. June Update: Lumber prices appear to have peaked last month and have now fallen more than 40% from the peak. Recent forecasts from lumber executives see prices continuing to fall the rest of the year. The following chart illustrates this:
Lumber prices are not being driven by lack of available trees or harvesting. It is a function of the capacity at saw mills and the impact of Covid shutting down some production and putting supply constraints in place for finished lumber for homes. Raw prices for trees are actually LOWER than a year earlier. This makes the margin being earned at mills nearly 6 times higher than normal! The following chart from Bloomberg illustrates the margin which lumber mills and wood producers are enjoying compared to prior periods:
Supply and demand will correct this anomaly. How quickly this occurs is a question. Indications are that new milling capacity will increase 6-7% in the south within 12 months or so. At these prices, those who can pass through prices may continue similar volume purchases. Those who cannot pass through pricing increases will necessarily need to decrease purchases and demand or lose money. Visit us often for updates on the the advantageous purchase window forecast.