The past few years have changed almost every facet of life. The way individuals communicate, do business, and engage with the economy have been seriously altered. One such impacted industry has been Lumber. For example, on December 15, 2022, a Yesler customer secured a load of 7/16” OSB for $271 per thousand square feet (msf). Just seven months prior a customer had paid $2,000/msf for the same product.
Economically, that sums up 2022. With rapidly rising interest rates tamping down exuberance in housing development, the over-stretched slinky known as the lumber and building materials (LBM) supply chain recoiled itself back into its original box.
Something big had to break the work-from-home, pandemic-led housing run-up, and it looks like the Federal Reserve did it. Their focus may be inflation on consumer goods and their tools may be focused on pumping the brakes on the broader economy, but the effect on housing was an abrupt stop. Fortunately, the housing market supply and demand dynamic does not at all resemble the severe oversupply crisis of 2006, so the tires won’t break loose and send this market off dead man’s curve. However, it may take a while to get back up to speed, especially if a recession is the outcome of the Fed tightening.
As a result of the economic volatility of recent years, there have been clear winners and losers. Some impacts are felt short term, like those who owned too much $2,000 wood that’s now worth $271.
Other impacts are long-term, and the outcome may be more cyclically dependent. For those of us who were around in 2006, we know the carnage that occurred from lumber yards to producers who had acquired assets at a premium during the run-up. Many of these assets were acquired at a market premium (irrational exuberance round one). The outcome was bankruptcy or liquidation to cash. The winners were those who picked up those distressed assets and rode them to the top of this market peak.
This time around it may be different.
A short-term pullback in the market won’t expose those who leaned too far over their ski tips with acquisitions at peak market prices. But, if a recession is the order of the Fed for 2023 and 2024, we may see a few faceplants as we get to the bottom of this run.
WHERE TO GO FROM HERE:
While the past few years have been tough and have come with much hardship, there are both hope and concrete actions that businesses can take to recover. The best news for the housing market, regardless of Fed policy, interest rates, and recession risk is that it doesn’t have as far to fall as last time. Whereas I am a contrarian in my views on the need for housing (see recent HBS Dealer article), the latest bull run in housing production did not grossly exceed the fundamentals of demand. Therefore, a pullback is likely short-lived. After all, people need shelter. Babies are born, people immigrate, and the housing market has a long history of self-correcting when left alone. So, the long-term bet in housing is still a winner, even if the short-term bet looks cloudy.
Housing cycles over many years are one thing, short-term seasonal cycles and swings are another—and within the operating control of lumber traders on both the buy and sell side. Yet time and again mistakes are made by commodity traders who take credit for genius when the market runs upward—and blame the market for failures on the downside. It’s easy to trick yourself into thinking you know how to manage market price trends in your favor. Here are a few tips from the tools and data that Yesler provides for traders: