Every bull market comes with its own set of assets that defy all expectations in terms of price moves. This time, we have lumber prices which made record highs and then have kept soaring higher.

A year ago, lumber prices were just under $300 for 1,000 board feet. Currently, prices are at $1,372. The previous high was in late 2018 around $650.

Supply and Demand Factors

The primary factor behind this rise has been the strength in housing which is leading to increased lumber demand. Another contributing factor is that the world continues to face supply chain issues that are leading to shortages and inflation for many inputs. It wasn't helped that many mills stopped producing at the onset of the coronavirus as many expected demand to plummet given the economic effects.

It's becoming increasingly clear that the country is going to have to build more housing in the coming years to meet increased demand which is being driven by demographics, low-interest rates, and strong household balance sheets. Housing supply is near record lows. As of last month, there are 3.6 months of housing supply based on current household formation rates. The historical average is somewhere around 8 months of supply available.

Household formation is another important metric to watch. We've had a decade of below-trend household formation. If this measure were to return to normal levels, it would indicate another surge in demand. And, it's quite possible that this measure trends higher than normal to compensate for the years of below-trend formation as historically, there's been a reversion to the mean.

What's Next?

One obvious concern is that high lumber prices will make housing more expensive and feed into inflation. It's estimated that it could take months for lumber producers to meet the increased demand.

In recent homebuilder earnings reports, they are concerned about the rise in prices but also confident that prices will come down as supply increases. Notably, margins haven't compressed which shows that increased costs are able to be absorbed by buyers.

Mills are expected to reach full capacity by this summer which should be helpful in easing prices. Many also expect that housing supply could increase with the pandemic's end. Essentially, many people have delayed downsizing or moving to retirement communities due to the pandemic. Thus as the health situation improves, many of these homes could become available and relieve some pressure on lumber and the housing market.