Upside volatility could be in store for lumber in 2023 after the essential homebuilding commodity surged 14% over the past two weeks.

Following a disastrous 2022, when lumber prices sank more than 60%, the industry could see a revitalization as mortgage rates decline from their peaks and supply dynamics come into focus. 

The average 30-year fixed mortgage rate has fallen from a high of 7% in October to about 6.15% today. A further drop in mortgage rates could drive renewed demand for home purchases as lower borrowing costs make buying a house more affordable.

Meanwhile, homebuilder sentiment is showing signs of bottoming after rising in January for the first time in a year. The increase was in part due to lower mortgage rates, and a sharp rise in homebuilders’ stocks suggest the housing market isn’t as weak as some might expect.

If homebuilding demand sees a rebound, so too should demand for lumber. And any jump in demand would come at a time when supply is lackluster, according to building products wholesaler Sherwood Lumber.

Amid last year’s sharp drop in lumber prices, North American suppliers right-sized production to fit the new demand environment. This led to less lumber inventory and limited future production growth as sawmills adjusted to the reality of low prices, according to Sherwood Lumber COO Kyle Little.

But now, such a shortage in lumber supply could come during the homebuilders’ upcoming busy season this spring and early summer.

«With inventories now so low, production shuttered, and offshore producers finding some better liquidity in Europe and Asia, the industry could actually find itself in an undersupplied market during the height of the building season,» Little told Insider via e-mail. 

businessinsider