Lumber falls after mortgage rates solidify their move above 6% amid hawkish Fed rate hikes

A discounted batch of planks is seen at a Home Depot store in Alhambra, California, as people shop for lumber on May 4, 2022. FREDERIC J. BROWN/AFP via Getty Images
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Lumber prices extended their two-day decline to 10% after the Fed hiked interest rates by 75 basis points on Wednesday.
The Fed's aggressive rate hike helped shore up the recent hike in mortgage rates above 6%.
"The lumber market remains in a state of general malaise as buyers anticipate lower aggregate demand going forward," Sherwood Lumber told Insider.
Lumber prices fell 6% on Thursday, extending their two-day fall to 10% after the US Federal Reserve hiked interest rates another 75 basis points.
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The Fed's aggressive rate hikes have helped shore up the ongoing rise in mortgage rates, which rose above 6% for the first time since 2008 earlier this month and have doubled over the past year. On Thursday, the average 30-year fixed-rate mortgage rate rose another 27 basis points from last week to 6.29%, according to data from Freddie Mac.
The rise in mortgage rates has significantly impacted home sales, which in turn has pushed down prices and hurt homebuilder sentiment.
“The timber market remains in a state of general malaise as buyers anticipate lower aggregate demand going forward. Many shipyards are trying to keep their inventories to a minimum and really aren't afraid of price hikes," Sherwood Lumber's director of risk management Steve Löbner told Insider.
“This has taken all the urgency out of the market for the past two years. We had some supply and transportation issues that caused short-term rallies, but these were all quickly dismissed. Home prices are being reset to reflect the rise in mortgage rates and that's a process that may take time," Loebner said.
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But the housing market hasn't fully collapsed yet, and after falling more than 70% from its record high, lumber prices still have some supply going forward.
"There is still a solid backlog of demand for existing single and multi-family [residential] projects... Multi-family demand in particular has been very robust and many dealers are reporting near-record backlogs of projects on the books that will start over. We've also started." "To see some modest limitations in [timber] production, which will become more common over time if prices remain low," Loebner said.
Steady demand for the essential construction raw material combined with declining supply due to possible production cuts could give lumber future upside potential, at least as long as demand lasts.
“We are in for a slower grind and a more challenging market environment. However, given that many of the benchmark raw timber items are already down about 70% from their levels earlier this year, the pervasive bearish sentiment and the likelihood of lower supply, traders would be wise to consider the risk/reward of a to weigh up negative attitudes," concluded Loebner.
Read the original article on Business Insider

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