Since the Federal Reserve started aggressively raising interest rates in mid-March this year, when the loose monetary policy during the new crown epidemic was no longer, the trend of lumber prices that soared last year has also begun to reverse.

The latest CME trading data shows lumber prices have halved since early March. Lumber futures for July delivery have now fallen to $653 a thousand board feet, down about 51 percent from a late-February high of $1,336.

Is the U.S. housing bubble about to burst?

The Fed’s aggressive rate hikes this year have pushed benchmark interest rates to multi-year highs. Rising borrowing costs have cooled the U.S. housing market, with both new and existing home sales falling.

Data released by the U.S. Department of Commerce showed that new home sales in April fell by 16.6% month-on-month, the fourth consecutive month of declines, the lowest since April 2020, and the largest drop in nine years.

In addition, the average fixed interest rate on a 30-year mortgage in the United States has soared to 5.1% from 3.1% at the beginning of this year, further reducing the ability of Americans to buy a home.

Will lumber prices fall?

Previously, lumber prices were a leading indicator of supply chains and inflation, affected by supply chain tightening following the coronavirus lockdown.

Since the 2020 outbreak, Americans sheltering at home have seen a surge in demand for home renovations and purchases of new homes, and lumber prices have soared one after another.

And now, as supply chains improve, demand for American homes has fallen further.

At present, the market generally expects that the Federal Reserve may raise interest rates by 50 basis points at the next meeting on interest rates, and some analysts believe that this may further reduce lumber prices.

According to John Burns Real Estate Consulting’s monthly survey of building materials dealers, just 12% of respondents in April said lumber stocks were tight, down from 61% a year ago.

Matthew Saunders, who heads the company’s building products research, said the recent decline in lumber prices was mainly due to lower mortgage rates due to soaring demand for new homes, as well as improved supply chains that allowed lumber stocks to gradually return to normal. But at the same time, Saunders also said:

We expect lumber prices to remain above their pre-pandemic levels, despite the near-half fall in lumber prices from their recent peaks in the short term.

It is also worth mentioning that Canfor, one of the world’s largest lumber producers, recently said that it will extend the production reduction plan to solve the problem of excess inventory. Canfor’s capacity has fallen by 20% since March.

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