<img height="1" width="1" src="https://www.facebook.com/tr?id=373327176680496&amp;ev=PageView&amp;noscript=1">
The Supply & Demand of Housing & Lumber Blog Feature

By: Michael Guckes, Senior Economist on June 30th, 2022

Print/Save as PDF

The Supply & Demand of Housing & Lumber

The last two years of supply chain disruptions have offered a real-world paradigm about the fundamentals of supply and demand and their absolute influence on prices. Among the many construction materials which have experienced extreme price fluctuations since 2020, few have been more volatile than lumber. Soaring demand for residential construction in recent years coupled with COVID-induced capacity reductions has seen wholesale lumber prices cycle through several rounds of extreme price hikes followed by significant declines.

It can be extremely difficult to measure the supply and demand independently and simultaneously for lumber, especially since both measures are dynamic which means their equilibrium point is constantly adjusting. However, tracking the inventory-to-sales ratio of lumber (as well as any other construction material) can provide insights not only to supply and demand but also to the logistics of getting the said material through the supply chain.

noarmalizing inventory to sales

Recent months of inventory-to-sales readings are averaging around 1.55, making them nearly identical to late-2019 levels. Should this ratio remain near this level moving forward, lumber prices may be expected to at least stabilize if not potentially decline as evidenced by the historical record of prices and inventory-to-sales ratios. However, the probability that lumber demand will remain constant in light of recent months of rising mortgage rates is unlikely considering the natural relationship between housing construction and the demand for lumber.

Calendar year 2022 housing starts and mortgage rate data have clearly illustrated the power of the relationship between low mortgage rates and housing starts. The doubling of mortgage rates in the nine-month period through June 2022 has upset a multi-decade trend of generally stable to improving home affordability. This upset has sent housing starts down 10% from their most recent peak and back to levels last seen in 2020. Furthermore, the continuation of rising mortgage rates—which is a virtual certainty for as long as the Federal Reserve continues to in its efforts to tame inflation—will reduce residential housing construction demand at a time when the industry is completing homes at its fastest pace in 15 years.

The significant possibility of a strong contraction in housing demand at a time when the residential construction industry is larger now than at any time since the Great Recession (measured merely upon housing completion rates) means that an industry correction is a real possibility in the near-term. For this reason, residential construction firms should have financial and operational contingency plans at the ready should the slowdown in housing demand worsen and remain depressed for a nontrivial amount of time.

single family starts


About Michael Guckes, Senior Economist

Michael Guckes is Senior Economist for ConstructConnect. He is an international speaker on the North American construction market. Michael has over a decade of economics-related experience in the construction and manufacturing industries.

Blog Categories