The price of lumber impacts many industries, from construction to transportation. When the real estate market cools down, fewer people spend money on home improvements and home construction, which means less demand for lumber. Lumber suppliers couldn’t keep up with the unique demand in 2021 due to supply chain issues and labor shortages. This led to the price of lumber skyrocketing. With the Fed raising interest rates, the entire economy is slowing down, influencing everything from real estate to discretionary spending. This means that folks aren’t as keen on spending money on home improvements as they were in 2021.

Jerome Powell

Federal Reserve Chair Jerome Powell said the U.S. housing market will probably go through a “correction” after a period of “red hot” price increases that have put home ownership out of reach for many Americans.  “There was a big imbalance … housing prices were going up at an unsustainably fast level,” Powell said following the Fed’s decision to raise its policy rate by another 75 basis points. “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.” The Fed’s rate hikes this year have had their biggest impact on the housing sector, slowing sales and bringing prices a bit lower. Shelter inflation will remain high for some time, Powell said.

Economic growth is projected to resume in the second half of 2022, but the combination of high inflation, monetary policy tightening, and a slowing housing market is likely to tip the economy into a modest recession in the new year, according to the September 2022 commentary from Fannie Mae. The Research Group continues to forecast 0.0 percent real GDP growth on a full-year basis through 2022, but it revised downward its expectations for full-year 2023 growth by one-tenth of a percentage point to negative 0.5 percent. …Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for single-family total home sales in 2022 and 2023 to 5.71 million and 4.98 million, which would represent declines of 17.2 percent and 12.8 percent, respectively. While multifamily construction remains strong, the ESR Group also revised downward its multifamily starts forecast for 2022 to 542,000 units but continues to expect demand for rental units to remain strong because of the single-family market’s relative unaffordability.

While the COVID-19 pandemic has triggered many social and economic disruptions, it has also changed working arrangements and has accelerated the shift to work from home (WFH). During the COVID-19 outbreak in the early of 2020, many businesses across the United States closed and millions of workers experienced the work from home trend out of necessity. This sudden and massive work from home experiment generated major lifestyle changes for workers, homeowners, business owners, and our communities. A new NBER working paper, “Working from Home Around the World,” provides some insight into the big shift to WFH and discusses implications for workers, organizations, cities, and the pace of innovation. …It stated that full WFH days averaged 1.5 days per week across 27 countries. …While “the big shift to WFH presents challenges for dense urban centers,” it also enabled homebuyers to relocate to low-density areas that have higher housing affordability conditions.

Continuing its tightening of financial conditions to bring the rate of inflation lower, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 3.25%. This marks the third consecutive meeting with an increase of 75 basis points. These supersized hikes are intended to move monetary policy more rapidly to restrictive policy rates. And the Fed’s leadership has signaled they intended to hold these elevated rates for a substantial  period time, well into 2024. …Looking forward, the Fed’s “dot plot” indicates that the central bank expects the target for the federal funds rate will increase by 75 more basis points in November, 50 in December, and then concluding with 25 points at the start of 2023. This would take the federal funds top rate to to near 4.8%.. ..Among the clear signs of economic slowing are just about every housing indicator.