The Lumber Crisis Explained

Happy Monday everybody!

You may have heard that lumber prices have skyrocketed – up nearly 300% from where they were a year ago. However, you probably don’t know that this massive surge stems from a slight miscalculation by sawmills at the beginning of the pandemic. When shutdowns started in March of last year, sawmills, like almost every other business, assumed that demand was going to plumet. Sawmills assumed that people were going to lock themselves away and save as much cash as possible, so they cut production across the industry by about 30%. While that is partially true, the lumber market saw the opposite. People being locked in their homes gave them the opportunity to think about things they wanted to change about their house and the time to do it. In 2020 when the US economy shrank by 3.5%, home improvement spending grew by over 3%. In addition, record low mortgage rates created one of the largest construction booms that we have ever seen. Despite the fact that the US has rapidly grown lumber production since last year and produced more lumber in February 2021 than any month before, lumber is still massively backlogged and expensive. This increase in price is especially felt by those looking for lower priced homes which have shot up due to construction costs, contributing to the lack of inventory across the country. Today, 70% of building claim they have raised home prices to combat this crisis.

Now, we have talked a lot about the lack of inventory. The Biden administration has proposed a $15k tax credit to first time home buyers to continue todays strong housing market. However, this is not going to solve the supply issue, its going to exacerbate it. We will continue to cover the lumber market crisis and the lack of inventory.

Mortgage Backed Securities are up 3 bps today after bouncing below the 50 DMA on Friday. With a lot of room to the downside and treasuries climbing, we are holding a locking bias.