Rapidly Rising Mortgage Rates Finally Impact the Price of Lumber, Durable Goods Are Next

May 16, 2022

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1:26 pm

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24 comments

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Economics

Lumber futures courtesy of the Nasdaq, annotations by Mish.

Rising mortgage rates and slowdown in housing make it pretty clear we’ve seen the peak in lumber prices for this cycle.

I expect to see lumber prices return to their historical norms in the $250-$400 range.

The following chart helps explain.

30-Year mortgage Rates

Mortgage rates courtesy of Mortgage News Daily

Rising mortgage rates will cool demand for housing and everything housing related.

Demand for lumber, appliances, carpet, landscaping, kitchen remodeling, cabinets, etc. will all drop steeply.

The falling stock market will also have a big impact on demands for goods, including autos.

Food, Rent, and Energy Prices are Totally Outside the Fed’s Control

How fast CPI falls will mainly depend on rent, gasoline, and the price of food. However, Food, Rent, and Energy Prices are Totally Outside the Fed’s Control

Rent and Owner’s Equivalent Rent (OER) are 31% of the CPI. By slowing housing, the Fed will also slow construction of apartments and condos. That peaks for lingering rent inflation.

Also, the BLS is way behind the curve in factoring in rent price hikes that have already happened.

On the other side of the inflation ledger, there is a huge supply of housing under construction.

Competing forces make it difficult to say if year-over-year inflation as measured by the CPI has peaked. If not, I think we are close.

Regardless, it will not be pleasant cycle for the Fed because de-globalization and the war in Ukraine are huge inflationary winds blowing smack in the Fed’s face.

This post originated at MishTalk.Com.

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24 Comments

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Christoball

1 year ago

After stocks, housing and lumber drops; oil will be next.

honestcreditguy

1 year ago

Reply to Christoball

nope, the oil vigilantes are the new bond vigilantes….smaller market, easier controlled….they are forcing inflation on the fed….the bond vigilantes are just smiling in background playing along with it

KidHorn

1 year ago

I predict Biden will eliminate or lower Canadian lumber tariffs once the price drops considerably. It will keep his perfect record of doing the wrong thing.

PapaDave

1 year ago

“How fast CPI falls will mainly depend on rent, gasoline, and the price of food.”

Not too fast, though year to year comparisons will show some moderation. Pressure is still upward. For example, food prices are unlikely to moderate anytime soon. Everyone
has seen the stories

Indonesia has restricted palm oil exports; India has suspended
wheat exports; Sunflower oil, wheat and other ag products are unable to be
exported from Ukraine and Russia; bird flu racing through US chickens; baby
food shortages; farmers in the western US facing drought; etc

link to fortune.com

link to news.sky.com

Gasoline and diesel prices will continue to rise until there
is enough demand destruction to balance it off. No one wants to build a new
refinery these days and old inefficient ones are being closed. So supply
remains a problem.

link to bloomberg.com

dbannist

1 year ago

I hope so.

I’m about to start a huge renovation project at my house and lumber prices coming back even to the 500 range would cut my costs in half.

Labor is free, so I don’t have to worry about that.

I’ve been tracking the cost of a 2×4 at my local Lowes. It peaked at 10.50 a board. Normal price for one is around 2 bucks. They are 7 now and falling.

shamrock

1 year ago

Biden will almost certainly wipe out $400b in student loan debt, how will that affect demand for goods? Probably more than offset the higher interest rates.

Tony Bennett

1 year ago

Reply to shamrock

Not much? Federal student loans have been in deferment for past couple of years.

shamrock

1 year ago

Reply to Tony Bennett

Yes, that’s true. I wonder if anyone has been prudent and not taken on debt they wouldn’t be able to afford if they had to start paying the student loans again.

KidHorn

1 year ago

Reply to shamrock

I’m not convinced Biden will eliminate any student loan debt. it would be a bad political move. There are way more people who don’t have debt than do and I would guess the vast majority of debt holders would vote for him no matter what.

shamrock

1 year ago

Reply to KidHorn

If they show up at the polls most will probably vote D, but the voting is all about turnout though.

KidHorn

1 year ago

Reply to shamrock

It won’t increase turnout because the debt will have already been reduced or eliminated. The vote will have no effect. Maybe people will be afraid it will be rescinded.

Tony Bennett

1 year ago

In the oops department

Empire state manufacturing report

prior … 24.6

expected … 15.0

range of “experts” … 5.0 to 18.5

actual … -11.6

new orders … 25.1 —> -8.8

Lisa_Hooker

1 year ago

Reply to Tony Bennett

Manufacturing? Well China is in lockdown.

thimk

1 year ago

this weekend I talked to a person who has is currently living in a campground for almost 1.5 years as awaits for his Florida new home to be completed. In order for a new home to get it’s certificate of occupancy it just about has to be move in ready . One piece can hold up the entire project . But on the deflating asset bubble list I see housing the most resilient particularly in red states.

Tony Bennett

1 year ago

“I expect to see lumber prices return to their historical norms in the $250-$400 range.”

…

I expect to see _______ prices return to their historical norms in the $xx – $xx range.”

It is all ONE trade … and has been for a while.

Recently, I’ve seen some “experts” think you can hide in commodities. Good Luck!*

Leverage (debt) everywhere (*including commodities). As financial conditions tighten it will sour.

Current generation of “investors” will learn the meaning of Pennies On The Dollar. It is most definitely NOT different THIS time.

thimk

1 year ago

Reply to Tony Bennett

come on Tony, there is always a bull market somewhere . Surprised you didn’t join in the oil and gas bonanza. Bitcoin drops below 30k. My current portfolio: house and 2 cars paid for , I-bonds , no debt, cash; I sleep soundly and to save money I’m expanding my cooking talents (just discovered bisquik) .

Tony Bennett

1 year ago

Reply to thimk

You’re solid.

I may be wrong, but supply demand curve for energy will see a drop in demand with no corresponding drop in supply as recession unfolds.

Now if pipelines / tankers / production fields subject to terr**ism … prices will certainly stay high.

Zardoz

1 year ago

Reply to Tony Bennett

I doubt it. People will complain fervently, but they’ll spend themselves to oblivion before buying less fuel.

bobcalderone

1 year ago

Reply to Zardoz

A lot of Americans would NEVER give up their trucks!

Lisa_Hooker

1 year ago

Reply to thimk

Bisquik makes astounding dumplings for chicken and dumplings.

LPCONGAS99

1 year ago

Reply to thimk

if you are doing that, and still getting _aid(L), you sir would be my idol

PapaDave

1 year ago

Reply to Tony Bennett

I am not an expert. And I am not “hiding out” in commodities. Rather, I listened to those on this site who laid out a scenario for why you should invest in oil and gas stocks. It made sense to me so I started buying all the recommended stocks. That scenario has played out even better than I expected. Those stocks are up 2x to 5x since I started buying and some of the companies are beginning to pay out up to 100% of free cash flow to shareholders. I like value, and these companies are in the process of using their huge cash flows to reduce or eliminate their debt. They are buying back their shares, increasing dividends, and declaring special dividends. Many trade at an EV/CF ranging from 1 to 4. For comparison Microsoft is 40. The scenario keeps going at any oil price over 80. At current prices it means a fantastic return. Their breakevens are in the $30-$40 WTI range. I will remain invested here as long as the scenario keeps playing out. But, of course, everyone has a different opinion. That’s what makes a market.

Tony Bennett

1 year ago

Reply to PapaDave

Fwiw, I think commodities will be a great play going forward … after the recession.

For now disinflationary / deflationary winds beginning to blow (strong $US + drop in demand). Summer of 2008 oil climbed to $144 barrel … many assured me no way it would drop due to peak oil / whatever … I think at one point < $30 barrel.

Just my opinion. You may well be right and I’m wrong.

PapaDave

1 year ago

Reply to Tony Bennett

There is a lot of volatility as well. Which is why I trade portions of my positions, while still holding most for the longer term. The market vacillates between boom and doom. Oil drops $5 and the bears push oil stocks down 10% or more. That’s when I step in and buy. Usually the stocks go back up within a week (or a day!). And then I sell that portion again.

Meanwhile, my long positions continue to pay out great dividends while they have gone up in value over the last year. And they are just starting to hit their stride as more and more of them reach their debt targets, they are committing to paying out more and more of their free cash flow.

To me, we are just in the second or third inning of this baseball game. I have been waiting patiently over the last year as these companies have been paying down debt and buying back shares. I can’t imagine wanting to leave now, just as they start to reach the point of large payouts.

Rapidly Rising Mortgage Rates Finally Impact the Price of Lumber, Durable Goods Are Next

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