Why lumber may see a tightening in supply come September

John Duncanson, Executive VP of Corton Capital Inc. and Timber Analyst on the Corton Global Timber Fund, joins Yahoo Finance to discuss the moves in lumber prices and outlook on the homebuilding space.

Video transcript

ALEXIS CHRISTOFOROUS: Well, it looks like the great lumber bubble of 2021 has finally popped. After reaching a record high of more than $1,600 earlier this year, lumber futures tanked more than 40% in June, its worst month on record. So where do lumber prices go from here? And what will the impact be on the housing market? Joining us is John Duncanson, executive VP of Corton Capital and timber analyst on the Corton Global Timber Fund. John, it is good to see you. I have to say, you called it. You said that lumber prices would hit $1,600 and then come crashing down in June. That's exactly what happened. Tell us why you think we've seen that dramatic pullback. And do you think prices have stabilized here?

JOHN DUNCANSON: Good afternoon, ladies. I think we're actually-- right, today, we're seeing the bottom. We'll go into a bit more explanation on that, but just a quick comment. It came down pretty rapidly. And if you pull back the curtain, you'll see that the weakest part of the housing demand was really just more of a postponement than a-- and a temporary item than a permanent one.

And it was largely the do-it-yourself crowd and the renovation market that, basically, with those record high prices, there was sticker shock at the home centers. And that coupled with people wanting to spend their Saturdays at the ballpark, because they could go there now, they just said, OK, let's-- we're seeing prices come off. Let's wait till September before we get back to the fixing up the back of the house.

So that was primarily the main cause. And you have to remember, about 40% of the lumber consumed in the United States-- and Canada, for that matter-- goes into the home-- through home centers into the repair and renovation market. So it's a significant market. The biggest market, of course, is home construction. And that is booming. It's on fire, so.

KRISTIN MYERS: So John, you're saying that you're seeing this level as being a bottom. Where do you see these lumber prices bouncing back to? And when do you think we might see that high?

JOHN DUNCANSON: Well, lumber prices, the cash prices, as per random lengths quoted last night, were down to 710. So we're down roughly 50% since the peak. If you look at the futures market right now, it's rallying again. It's up-- almost up to 800. So I think what will happen is the people that will-- when you get to individual do-it-yourselfers, the small contractors, they were waiting for a break in prices. And once they start reading the news that prices have physically bottomed here at the 700, 800 level, they'll all start looking at rushing back to the home centers. And that'll force the home centers to rebuild their inventories.

One real catalyst and live one that's happening right now is the fire season. The wildfires, they've been started in Oregon and Washington over the last couple of weeks. But the real bad ones are starting right-- they are happening right as we speak in the British Columbia, which is the western part of Canada. And this is-- and there's some very serious fires going on right now. And this is due to the heat wave we've had over the last week. There are 99 fires, as of last night-- new fires-- that are all out of control.

So what has happened-- what will happen is the provincial government-- I've been through this many cycles. The provincial government will ban logging. They won't let logging trucks into-- and they'll shut down the logging operations. Meanwhile, the sawmills themselves, because of the very high prices and the high operating rates, have very little log inventory sitting at the mills. So any disruption, like a logging ban, even though it's going to be temporary-- but it could be three or four weeks. It could be a month and a half if it's a really bad fire season. They're going to force those mills to shut down.

So if I was looking at-- if I was playing the market cash wise and wanted to buy physical lumber, I'd be stepping up right now. Because come September, we could see very tight supply again. And to answer your question, I think we'll be back up over $1,000. Maybe not $1,600, but we've got a lot of building season left there. And the home builders are continuing to see a very strong market. So my guess is it will be over $1,000. It could be $1,200 by Labor Day.

ALEXIS CHRISTOFOROUS: Wow, so I guess there was a little hope there that maybe this dramatic drop in lumber prices would be passed along to home buyers because they're dealing with the most expensive homes on record right now with the average selling price. Do you think that these lumber prices at elevated levels are going to push home prices even higher, as we head into the summer and fall?

JOHN DUNCANSON: I think there'll be a little bit of a break right now, Kristin. And I think that they'll-- there's a lot of relief, I think, for the large homebuilders because they'll be able to average down on some of their going forward orders. But one thing I've noticed that the homebuilders, because of all the price volatility and volume availability that's happened over the last four, five, six months, they've pulled back from building out supply chains of three months. They've gone down to one month.

So if they can capture and average down some of their lumber prices, there may be a little bit of relief on the sticker price of a new house. But it won't be much. And then, if I'm right, we're back up over $1,200. It's a lot less than $1,600, obviously, but you're not going to see a noticeably small break in prices for new houses, I don't think.

ALEXIS CHRISTOFOROUS: All right, John Duncanson of Corton Capital, thanks so much for being with us. We appreciate it.