Lumber Prices Set For A Surge As Homebuilding Rebounds

Get ready for a lumber surge.

The homebuilding business looks like its ticking up again after a tricky 2022. And with it investors should see lumber prices lift as well. The latter had a brutal year also.

“Lumber, we believe has made a major low,” writes Shawn Hackett, president of Hackett Financial Advisors. “The lumber market has likely made a major low and can trend substantially higher over the next year.”

Indeed, the prices of random length lumber futures shed two thirds of their value over the last 11 months.

In mid Janaury futures contracts fetched $344 per thousand board feet, down more than two thirds from $1,464 in early March last year, according to data from TradingEconomics.

A big part of the slide came as a result of the Federal Reserves war on inflation and the resulting increases in interest rates. In turn, those higher interest rate torpedoed the housing market which had already become overheated during the COVID-19 pandemic.

U.S. housing starts fell from a recent annualized rate of 1.8 million in April, down to 1.4 million in December, TradingEconomics reports.

Home construction is inextricably linked to lumber demand and prices, so aa drop in the rate of construction can generally be expected to mean a fall in lumber prices.

However, that may have come to an end.

Sentiment among homebuilders has ticked up lately meaning residential construction companies likely see more business in the coming months. The National Association of Home Builders (NAHB) Housing Market Index (HMI) rose to 35 in January from 33 in December. That increase comes after the index fell every month since December 2021.

Optimism among such companies, like those held by the SPDR S&P Homebuilders ETF (XHB) exchange-traded fund, suggests that demand for new homes and by association lumber, will pick up in the coming months.

In addition, to U.S. housing activity, the reopening of China will likely add some lumber demand, Hackett says.

Savvy traders wanting to profit from the likely rebound should consider buying random length lumber futures on the CME. However, that is a lightly traded market and may present inexperienced traders with some difficulty as thin markets tend to be more volatile.

The alternative might be to purchase the Homebuilders ETF mentioned above.

As always there are risks. Most notably the Fed may decide to keep raising interest rates which would likely renew the downtrend for the housing and lumber markets. The boost from China’s reopening may not last long.