Lumber prices surged more than 7% on Thursday to $638 per thousand board feet, representing the biggest daily gain for the essential building commodity in months.

The rally in lumber prices came as mortgage rates fell for the first time in four weeks, according to data from Freddie Mac. The average 30-year fixed mortgage rate fell 11 basis points to 5.70% over the past week, while the average 15-year fixed mortgage rate fell 9 basis points to 4.83%.

“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession. This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation,” Freddie Mac said.

If the decline in interest rates continues, it could help reverse the recent slowdown in the home builders market and spark more demand for lumber as April and May saw a noticeable decline in building activity due to restrictive mortgage rates.

One home builder in Denver summarized the driving force behind the housing slowdown as “higher rates are definitely bringing a chill to the market,” according to a survey from John Burns Real Estate Consulting.

A positive sign on Thursday that suggested mortgage rates could extend their downtrend next week was the decline in the 10-year US treasury yield, which briefly dipped below 3% and fell 9 basis points. That’s a big drop from the 10-year’s cycle-high yield of 3.50% reached earlier this month.

The flipside to fast-falling interest rates is that it signals an economic recession could be imminent, which is a big enough factor to grind the housing market to a halt and lower demand for new homes. If that’s the case, then lumber’s recent price rise may be short-lived, and its longer-term downtrend should resume.

Lumber prices are down 63% from their May 2021 high of $1,733 per thousand board feet, and are down 43% year-to-date.

businessinsider