Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Lumber Prices Are Surging as Housing Slumps
Transcript
- Lucas: Lumber futures have rallied more than 18% in the last month, and that is running directly against the narrative that the housing market is in a slump. So what gives? Luna: It does feel contradictory. Housing starts are down, mortgage rates are still elevated—you'd think lumber would be falling, not surging. Lucas: Exactly. And that's what makes this such a great case study in how commodity markets actually work versus how we assume they work. The short answer is that lumber isn't driven by new-home construction the way it used to be. There's a supply story here that's far more powerful than the demand side. Luna: So let's start with the supply side. What's actually constraining lumber output right now? Lucas: A few things. First, sawmill capacity in North America has been shrinking for years. After the 2022 price collapse, a lot of mills shut down permanently. We're talking about maybe 5 to 6 billion board feet of annual capacity that's just gone. Then you layer on the tariffs. The current 14.5% duty on Canadian softwood lumber essentially raises the cost of every two-by-four coming across the border. Luna: And Canada supplies about a third of U.S. lumber consumption. So that's a big chunk of supply getting more expensive. Lucas: Right. And it's not just tariffs—it's also the fact that British Columbia, which is a major lumber-producing region, has been hit hard by pine beetle infestations and stricter logging regulations. Their allowable cut has dropped something like 40% over the past decade. So even if U.S. demand stays flat or declines a little, the supply base is structurally smaller. Luna: But hasn't demand actually declined? Housing starts are down year-over-year. Lucas: They are. April's data had starts at about 1.36 million annualized, which is down about 4.5% from last year. But new-home construction only accounts for about 40% of lumber consumption. The rest goes into repair and remodeling, and that segment has been surprisingly resilient. Luna: Because people aren't moving, they're renovating. With mortgage rates where they are, the lock-in effect is real. Lucas: Exactly. The 30-year fixed is still hovering around 6.8%. So homeowners who locked in 3% rates are staying put, and instead they're putting money into decks, additions, fences. The National Association of Home Builders has remodeler activity index running well above pre-pandemic levels. That's keeping a floor under lumber demand even as new construction slows. Luna: So it's really a tale of two markets: new builds are sluggish, but the existing home renovation market is chugging along. Lucas: Precisely. And then there's the fact that lumber futures on the CME are a financial market too. When the supply-demand balance is tight, any whiff of bullish news—like a mill closure or a tariff increase—can trigger speculative buying. The open interest in lumber futures has actually risen 12% in the past month, which tells me hedge funds and commodity traders are piling in. Luna: Which, of course, can amplify the move beyond what physical fundamentals alone would justify. Lucas: Right. So the rally is partly real—physical supply is tight—and partly financial. But here's the key question: does this last? Or does it collapse like it did in 2023? Luna: What's different this time? The macro backdrop feels similar—rates high, housing soft. Lucas: What's different is the supply side is more constrained now. In 2023, mills had idled capacity they could ramp back up quickly. A lot of that capacity has now been permanently dismantled. The Canadian lumber industry is also facing longer-term headwinds from policy and beetle damage. So even if demand weakens further, supply can't really increase much—it might even shrink more. Luna: So you're saying the floor under lumber prices is higher than it used to be. Lucas: I think so. The days of sub-$300 lumber are probably gone for a while, barring a major recession. But that doesn't mean prices can't correct from here. If we get a big jump in housing starts—say, if rates drop sharply—then sure, prices could go higher. But if the economy slows more than expected, renovation spending could take a hit, and then you'd see lumber fall back toward $400. Luna: Let's talk about the bigger picture. How does lumber's rally fit into what we're seeing across other commodities right now? Lucas: It's actually pretty distinctive. Most commodities are either flat or down this quarter. Crude is sliding—Brent is around $95 today—gold is holding near record highs but has stalled around $4,477. So lumber is one of the few bright spots. It's a reminder that every commodity has its own micro story. You can't just say 'commodities are up' or 'commodities are down.' Luna: Right, and copper is also doing well, up about 2% this week. So maybe the theme is supply constraints? Both copper and lumber are facing structural supply limits. Lucas: That's a good observation. Copper has its own supply issues with mine closures and underinvestment. So there's a thread: commodities where supply is structurally constrained are outperforming those where supply is elastic. Lumber fits that perfectly. Luna: What about the impact on builders? They're already dealing with high labor costs and land prices. Now lumber is adding to input costs. Lucas: Yeah, it's a real squeeze. Builders have been absorbing some of it, but their margins are getting compressed. The NAHB's sentiment index has been hovering in the low 40s—anything below 50 is pessimistic. If lumber stays high, you might see more builders offering incentives or even delaying starts. That could actually put a further drag on housing supply, which keeps home prices elevated. Luna: So the lumber rally might accidentally reinforce the housing affordability crisis. Lucas: Exactly. It's a circular problem. High rates reduce demand, but constrained supply keeps prices high, and now input costs are rising too. There's no easy fix. Luna: Speaking of no easy fix, I have to say—episodes like this, where we connect the dots between different forces, are exactly why I love doing this show. It makes the economy feel a little more understandable. Lucas: I feel the same way. And you know, if today's episode made something click for you, if you walked away with a clearer picture of why lumber is rallying against the grain, that's the kind of value we try to deliver every day. We keep this show ad-free because we want it to be purely about the analysis, not the sponsors. Luna: Right. And the only way that works is if listeners who find it valuable chip in. It's a small ask, but it makes a big difference. Lucas: Honestly, if today was worth a coffee to you, that's the link—buy me a coffee dot com slash fexingo. It helps us keep the lights on and the analysis sharp. Luna: Anyway, back to lumber. You mentioned that the rally might be partly speculative. How do we track that? Lucas: One good indicator is the CFTC's Commitment of Traders report. For lumber, the net speculative long position has increased by about 3,000 contracts over the past two weeks. That's a big move for a relatively thin market. When speculators get too long, it can set up a correction if sentiment shifts. Luna: So there's a real risk of a snapback if, say, housing data comes in weaker next month. Lucas: Absolutely. If we get a housing starts number that surprises to the downside, or if the Federal Reserve signals that rates will stay higher for longer, you could see a rush for the exits. Lumber is volatile—that's its nature. Luna: So what's your takeaway for our listeners? Whether they're investors, builders, or just people who bought a lot of wood for a project? Lucas: For investors, I'd say don't chase the rally here—the risk of a pullback is real. For builders, consider locking in prices if you have projects coming up, because the supply constraints aren't going away anytime soon. And for homeowners eyeing a big renovation, you might want to buy materials sooner rather than later. The structural tightness in lumber suggests prices could stay elevated through 2026. Luna: So the key lesson: even in a weak housing market, lumber can rally if supply is tight enough. It's a reminder that commodities are local, not global. Lucas: Exactly. Every commodity tells its own story. And lumber's story right now is one of shrinking mills, persistent tariffs, and a generation of homeowners who'd rather build a deck than move.