Lumber prices are flirting with a crucial level as mortgage rates jump above 5% for first time in years

• Lumber futures are coming under pressure as the housing market gets more restrictive for new buyers.
• Lumber prices remain subdued below critical support at $1,000 per thousand board feet.
• Mortgage rates surged above the 5% level on Tuesday for the first time in years.

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Lumber futures are struggling to reclaim a crucial support level as the housing market gets more restrictive for first time home buyers thanks to surging mortgage rates.

Lumber prices per thousand board feet fell 1.5% on Tuesday, remaining subdued below their crucial $1,000 per thousand board feet level, which has served as support multiple times since it crossed above that threshold in December. The essential building material is down 30% from its March high of $1,357 per thousand board feet. 

The ongoing weakness comes as mortgage rates rise following the Federal Reserve's rate hike last month. The popular 30-year fixed mortgage rate surged above 5% on Tuesday for the first time in years. The rate hit 5.02% on Tuesday, which is the highest since 2018, when mortgage rates briefly surged above the 5% threshold. Before then, mortgage rates hadn't touched 5% since 2011. 

Higher mortgage rates will only add barriers to an already restrictive housing market, where home prices have been pushed to dizzying heights by cheap debt. For home buyers, especially those looking to break in for the first time, higher mortgage payments and supply-demand imbalances are creating an affordability crisis. 

Eventually, this could all lead to a drop in demand for housing, which in turn would 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 note last month. 

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 slow its current rate-hiking cycle.

And it appears the jump in interest rates is already impacting home sales. 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 had expected new home sales to rebound from January's decline to about 810,000. 

A further rise in mortgage rates could help balance the supply and demand of new homes, which in turn could put continued weakness on lumber prices.