Lumber prices fall 22% in March as housing market cools on soaring mortgage rates

• Lumber prices have fallen 22% from their early March peak as the housing market shows signs of cooling.
• New home sales fell for a second straight month in February, dropping 2% to a seasonally adjusted annual rate of 772,000 units.
• Borrowing costs have surged as Fed tightening has sent the 30-year fixed mortgage rate to 4.7%.

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Lumber prices are bucking the trend of other supply-constrained commodities and moving lower in March as the housing market shows signs of cooling down.

Lumber futures have dropped 22% from their early March high of $1,357 per thousand board feet to $1,054 Wednesday. The ongoing decline comes after new home sales fell for the second straight month in February, missing forecasts.

February home sales fell 6% year-over-year to a seasonally adjusted annual rate of 772,000, according to data from the US Commerce Department. Economists expected new home sales to rebound from January's decline to about 810,000.

The decline in new home sales comes as mortgage rates surge to multiyear highs. The average traditional 30-year fixed mortgage rate hit 4.72% on Tuesday, representing a swift rise since the Federal Reserve began its cycle of raising interest rates last week. On Friday, the rate was 4.46%.

Those higher rates make homes less affordable for consumers by lifting monthly mortgage payments. And a cooling of the housing market could lead to a slowdown in new construction next year, contributing to a continued decline in lumber prices, according to ING Economics.

"We see a growing likelihood that the housing market will start to move from one of significant excess demand, which has fueled the house price and construction surge, to one where we are in better balance," ING's chief international economist James Knightley said in a Wednesday note. 

Excess housing supply would be a welcome sign to new home buyers, as it would help bring down surging prices which have been turbo-boosted since the start of the COVID-19 pandemic in early 2020. Extra supply would also help slowdown the pace of growth in rent prices, and thus help tame inflation and give the Fed breathing room to cut interest rates in the future.

"Should home prices stabilize and potentially even fall, this can quickly translate into lower inflation readings. This would give the Fed more flexibility to respond with interest rate cuts if they do indeed end up hiking so much that the economy starts to weaken," Knightley said.