Lumber prices start year up 19%—5 bold predictions for where the key housing indicator heads next

That predictive power is why economists and analysts alike are once again paying close attention to lumber: After nosediving to $383 per thousand board feet by the end of 2022, the lumber futures price has since jumped 19% to $454 as of Wednesday.

Does this slight rebound in lumber prices—which floated between $350 to $550 in the years leading up to the pandemic—just mean that lumber is nearing its bottom? Or does it signal some broader rebound in the slumped U.S. housing market?

To better understand where lumber and the U.S. housing market might head next, Fortune reached out to Dustin Jalbert, senior economist of wood products at Fastmarkets.

Here are Jalbert’s five bold predictions for where the lumber market heads next.

1. U.S. housing starts have further to fall

Jalbert expects U.S. housing starts to drop by double-digits this year. His reasoning? New home sales in the U.S. have been off by 20-30% since the beginning of last year because of “plummeting home affordability,” triggered by high mortgage rates and high home prices. Cooling demand coupled with a historic number of homes currently under construction, which creates a flow of “shadow” inventory, worsens the oversupply and triggers a pullback in housing starts. 

Although it’s widely forecasted that housing starts will drop this year, by how much exactly varies. Jalbert expects housing starts to drop 13%, which he says leans towards the optimistic side. The outlook is a bit more gloomy for single-family homes, which he predicts will fall by 16% in 2023 as mortgage rates continue to hover around 6%. However, for multifamily starts, Jalbert predicts it’ll drop 7% this year. 

The difference between the two outlooks is based upon strong apartment demand that’s expected to pull multifamily starts forward. But supply chain disruptions, labor shortages, rent growth, and challenging financial conditions will put the same downward pressure on multifamily starts as single-family starts. 

2. Lumber demand will drop again

U.S. lumber consumption will fall somewhere between 4% and 5% in 2023, Jalbert predicts. He estimates that in 2022, lumber consumption fell by 1.6% as a result of “sudden weakening in new residential construction activity in the second half of the year and a major correction in do-it-yourself (DIY) lumber demand.”

Moving forward, the repair and remodeling market will moderate some of the demand losses, while professional remodeling is likely to weaken with the decline in national home prices.

A 4% to 5% decline in lumber consumption (or 2.2 billion board feet) would be the largest decline in a single year since 2009—a year that saw a 8 billion board feet decline.

While this predicted drop wouldn’t be catastrophic, it would be challenging for building material retailers, wholesalers, and mill operators.

3. Record volatility in lumber prices since 2020 is over

The volatility in lumber prices that’s rocked the market since 2020 is over due to the expected decline in demand, Jalbert suggests. And although lean inventory can drive lumber prices up, it can’t do so without demand—so the record volatility seen since the spring of 2020 “appears to now be in the rearview mirror.”

4. There’s more British Columbia sawmill closures on the horizon

Jalbert anticipates that “a substantial portion of industry capacity is set to close,” because of weak market conditions and constraints to long-term fiber availability. He expects these indefinite or permanent closures to take effect in the Canadian province after several rounds of temporary sawmill curtailments, coupled with weakening demand and lower lumber prices. 

“This will be a key factor that helps tighten the market, particularly in the second half of 2023 when we expect demand will begin reversing course and the bulk of the production cuts will begin to be felt,” Jalbert wrote. 

In total, he expects British Columbia sawmill closures to wipe out production capacity of 1.5 billion board feet.

5. Inflation— and mortgage rates—will drop significantly in 2023

Inflation will fall significantly in the second half of this year, edging closer to the Federal Reserve’s 2% target, Jalbert predicts. With that, the Fed could choose to stop raising interest rates and in turn mortgage rates could drop, thus revitalizing home buying activity. 

That, of course, would be welcomed by both homebuilders and lumber producers.

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