Are Lumber Prices A Leading Indicator For Inflation And Housing Market? What The Data Shows

In July 2020, lumber prices began to soar as the COVID-19 pandemic supply chain chaos kicked in. Surprisingly, lumber began rising before many other commodities such as wheat, corn, WTI crude oil, Brent crude oil and natural gas.

Why This Matters: Lumber can be seen as a leading indicator of inflation, as the consumer price index (CPI) for all items rose to 7% from December 2020 to December 2021, and a majority of commodities did not see a run-up until 2021, which has lasted through 2022.

Additionally, the decline in lumber prices has also moved in tandem with the slowdown of new residential construction.

According to the U.S. Census Bureau, privately owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,526,000, which is 10.1% below the October 2021 rate of 1,698,000, while privately owned housing starts in October were at a seasonally adjusted annual rate of 1,425,000 and is 8.8% below the October 2021 rate of 1,563,000.

Privately owned housing completions in October were at a seasonally adjusted annual rate of 1.34 million, down 6.4% from September, but up 6.6% year-over-year.

The price of lumber hit a peak of $1,670.5 per thousand board feet on May 3, 2021, and a high of $1,185.3 per thousand board feet on March 14, 2022.

Read Also: Read Benzinga's housing page to find out more about what is happening in the market

Following the first Fed rate hike of 25 bps on March 16, 2022, and the following hikes thereafter, the price of lumber has continued to tumble, and has now stabilized around 2018 levels of $426.6 per thousand board feet.

Furthermore, 4.43 million existing homes were sold in October (SAAR), down 5.9% from September and down 28.4% from October 2021, according to the National Association of Realtors (NAR).

The National Association of Realtors also reported the total housing inventory at the end of October amounted to 1.22 million units, down 0.8% from September and 0.8% from one year ago.

By tracking the prices of lumber in the summer of 2022, it was noticeable that there had been a slowdown in new home building as the lumber futures chart showed a falling knife pattern.

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Home Retailers: Specialty retailer Home Depot Inc (NYSE: HD) has so far held up against inflation beating its third-quarter expectations as the average ticket price rose to roughly 9%, but consumer transactions were down by more than 4%.

Meanwhile, home furnishing companies RH (NYSE: RH) and Williams-Sonoma, Inc. (NYSE: WSM) have seen some shakiness in their margins growth, as profits are starting to slow down from 2020.

Spotting the price of lumber declining could have also been beneficial in determining the slowdown in consumer spending at home furnishing companies since declining lumber demand can be attributed to less new residential construction.

Photo: Miljan Zivkovic via Shutterstock