Lumber falls 21% in 8-day losing streak, but analysts see a bottom forming for the key building commodity

• Lumber prices have plunged 21% in what has turned into an eight-day losing streak for the commodity.
• But analysts at Raymond James expect a turnaround in lumber prices as inventory remains lean.
• "If the homebuilders' January momentum proves sustainable... many lumber suppliers could be caught flat-footed," Raymond James said.

Lumber prices are on the decline again as questions continue to linger about the current state of the housing market.

Lumber futures fell 3% to $402 per thousand board feet on Tuesday, and the essential building commodity has suffered an eight-day losing streak that has erased 21% off of futures' pricing.

The 23% price decline seen in lumber so far in February is an about-face from its strength seen in January, in which the commodity surged 37%.

But analysts at Raymond James expect a turnaround in the lumber market in the coming months as the busy homebuilding season heats up. That, combined with lean inventories means lumber prices could rally back above $500 per thousand board feet.

"We gathered significant new data from homebuilders suggesting a much stronger than expected January demand response from homebuyers, which has in turn led several builders to embrace strategic operating shifts that will maintain higher production levels of unsold spec homes this spring," Raymond James analyst Buck Horne wrote in a Friday note.

The data Raymond James sees is giving it confidence that a bottom is in for lumber prices.

"Combining this confirmation of significant pent-up housing demand, a positive inflection in production plans among homebuilders, and a parade of recent capacity curtailments from Canadian lumber producers - we believe the seasonal low for cash lumber prices has already been made," Horne said.

Conversations had between Horne and industry contacts "suggest that available lumber inventory for quick delivery remains extremely lean in the supply chain," according to the note.

That means if the strong homebuilders confidence seen in January proves sustainable, "many lumber suppliers could be caught flat-footed," Horne said, adding that such a scenario would set the stage for another seasonal rally in lumber prices.

And Raymond James thinks lumber could mount a recovery well into 2024.

"We do think a strong case has been made that cash lumber prices will continue to rebalance toward British Columbia's marginal production costs (which we now estimate ~$500/mbf USD), and likely higher still in 2024," Horne said.

As to how high lumber prices could go, Raymond James projected that lumber futures could rise to $500 per thousand board feet in the second half of the year, and then rise to $525 in 2024. That represents potential upside of as much as 31% from current levels.