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The lumber bubble burst. Here’s what comes next

June 22, 2021, 4:32 PM UTC

After climbing to historic heights this spring, lumber prices are headed back down—fast. Last week the cash price per thousand board feet of lumber fell $211 to $1,113, according to industry trade publication Random Lengths. That’s down 27% from its $1,515 all-time high on May 28.

“We are in a free fall,” Andy Goodman, CEO of Sherwood Lumber, told Fortune. In the lumber futures market, prices are down even more—dropping 47% since going above $1,700 on May 10.

Why are lumber prices finally correcting? The exorbitant price of lumber finally has some homebuilders and DIYers backing off. New home construction in May is down 8.8% from the 14-year high set in March. While home improvement sales are down 8.1% since setting an all-time high in March. Incentivized by record-high prices, sawmills and loggers rushed to tick up production. Of course, rising supply and falling demand is a perfect recipe for a price correction.

Stinson Dean, CEO of Deacon Lumber, agreed that buyers balking at sky-high prices are helping to alleviate the problem. But, he said, it’s also down because the dynamic that led to the historic lumber squeeze in the spring has already played out—and won’t happen again.

“The spring short squeeze to $1,700 wasn’t really felt by the builders as much as it was [by] their vendors. The builders locked in their price with the vendors in the winter and the vendors had to cover it at high prices…now vendors aren’t offering forward price locks so they don’t get squeezed again,” Stinson told Fortune. “The short squeeze dynamics are not there today like they were in the spring.”

The price of lumber may be crashing—but we’re still far above pre-pandemic levels. The cash price is still up 211% from spring 2020. Prior to the pandemic, lumber prices fluctuated between $350 to $500 per thousand board feet.

“Prices will continue to decline for the next few weeks and gradually stabilize. Buyers will need to fill inventories in the coming weeks,” Goodman told Fortune. He believes elevated prices could last years: “In general everything reverts back to the mean, however we believe that the mean for the next one to three years will be higher than the past 10 to 15-year mean. This is due to the high demand we expect on top of inflation.”

The consensus among industry insiders Fortune has interviewed over the past few weeks is that prices could drop to $600 per thousand board feet before the end of the year. As the cash, or wholesale, lumber price falls it will take time for those discounts to be reflected in big box stores like Home Depot. But even with this lumber price relief, your new fence or deck is still going to cost a lot more than it would have pre-crisis.

Why are prices unlikely to reach pre-pandemic levels anytime soon? Even though homebuilding and DIY are slowing a bit, they’re still running hot. In May, new home construction was 26% above Jan. 2019 levels. Meanwhile, home improvement sales are up 23% during the same period.

As Fortune has previously reported, this historic lumber shortage was spurred by a perfect storm of factors set off during the pandemic. When COVID-19 broke out in spring 2020, sawmills cut production and unloaded inventory in fears of a looming housing crash. The crash didn’t happen—instead, the opposite occurred. Americans rushed to Home Depot and Lowe’s to buy up materials for do-it-yourself projects, while recession-induced interest rates helped spur a housing boom. That boom, which was exacerbated by a large cohort of millennials starting to hit their peak homebuying years, dried up housing inventory and sent buyers in search of new construction. Home improvements and construction require a lot of lumber, and mills couldn’t keep up.

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