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Should Crashing Lumber Prices Change Your Mind on Home Depot Stock?

By Parkev Tatevosian, CFA – Aug 6, 2021 at 8:30AM

Key Points

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Lumber is a core component for many of the projects that drive people to Home Depot.

Home Depot (HD -1.11%) has experienced a sales surge since the pandemic's onset. Customers cooped up at home are noticing things that need to be fixed. Furthermore, the drastic lifestyle change encouraged home updates. 

For instance, the work-from-home trend created an urgent need for home offices. Some folks turned existing spaces into home offices, and others built entirely new rooms to accommodate the extra need. Hundreds of millions of folks worldwide were abruptly forced to work from home, entertain themselves at home, and learn from home.

The lumber aisle at Home Depot.

Lumber prices are crashing. Image source: Home Depot.

The sharp increase in demand for materials used in home improvement caused lumber prices to skyrocket. Rising to $1,688 per 1,000 board feet at its peak in May of this year, it increased nearly sevenfold from the bottom in April 2020. Fortunately for consumers, the price of lumber is crashing down, reaching $605 per 1,000 board feet as of this writing. Still, excluding the pandemic boost, lumber prices are the highest they've been in the last 25 years.

That being said, are crashing lumber prices any reason to change your mind on Home Depot stock? Let's take a closer look.

Lumber price shock

The need for lumber as a core component of so many home-improvement projects made consumers less price conscious. If you needed to build a home office for work, you're not likely to abandon the project because it cost $600 when you thought it would cost $300. As a result, Home Depot was able to increase revenue by passing along higher lumber prices to consumers. The return on creating a home office was so high that consumers did not balk at high prices. 

If you haven't experienced the surge in lumber prices yourself, this comment from Home Depot President and COO Ted Decker in its first-quarter conference call should give you a sense of the increase:

This was another record-setting quarter for lumber prices. Let me give you an example of what that means for one of our core lumber SKUs... at the end of the first quarter last year, a sheet of 7/16" OSB [oriented strand board] was approximately $9.55. As we exited the first quarter this year, that same sheet of OSB more than quadrupled in price to $39.76.

A Home Depot storefront.

Falling lumber prices will help consumers. Image source: Home Depot.

What goes up must come down 

It was inevitable that lumber prices would come down from levels far above where they've been in the last 25 years. And the timing is great for consumers and Home Depot alike. Economies are reopening, and people have more options with their time and money. Furthermore, many businesses aim to have workers back in offices by the end of the year, although the delta variant could derail those plans. 

Spending less time at home means the return on investment for those home-improvement projects decreases from elevated levels during widespread lockdowns. That could make folks more price conscious when considering their next project. And lower lumber prices may encourage people to take on projects they otherwise wouldn't have. 

The verdict

Overall, crashing lumber prices are a good thing for Home Depot if they stay low. It would be difficult to manage continued volatility in such a core input. And customers would grow weary seeing prices fluctuate wildly from month to month or even week to week. 

However, the trend is not far enough along to change how investors should think about Home Depot stock.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool has a disclosure policy.

Stocks Mentioned

Home Depot Stock Quote
Home Depot
HD
$320.48 (-1.11%) $-3.61

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