What does lumber tell us about housing prices?
Joe Perry April 27, 2021 4:25 PM
As the price of lumber continues to rise, we should continue to expect the price of housing to rise as well.
Many industrial commodities, such as copper, iron ore, and lumber, are trading at or near all-time highs. Lumber is said to be a leading indicator for housing prices. Therefore, as the price of lumber rises, traders should expect housing prices to rise soon afterwards.
Lumber has been moving higher since putting in pandemic lows on April 1st, 2020 near 251.5. Five months later, it closed near 945.0. By November 1st, lumber had given back over half its gains, however held the 200 Day Moving Average near 493.9 and began forming a symmetrical triangle. Lumber broke higher out of the top of the triangle on February 5th and pulled back for a retest. After moving back out of the triangle on March 22nd, Lumber has been on a tear higher, only closing lower on 2 days and gapping higher day after day! Support is back at the April 22nd lows, near 1243.7 and then the rising trendline (green) dating back to mid-September 2020, near 1160. Horizontal support below there is near 1030.4. Notice that the RSI is nearing extreme overbought conditions (above 84!) which indicates a pullback or sideways consolidation may be ahead, however the pullback of the RSI in Q1 2021 proved it to be an ineffective tool as price continued moving higher. Traders should be keeping an eye on this chart for possible pickups or slowdowns in the housing market.
Source: Tradingview, CME, FOREX.com
Rising housing prices have been in a concern in some countries recently, including New Zealand, Australia, Canada, and the United States, among others. Just today, the S&P CoreLogic Case-Schiller Home Price Index for February rose to 246.02, its highest level ever!
Source: Trading Economics
In March, the New Zealand government announced they would phase out the tax deduction for mortgage interest in order to reduce speculation and lower prices in the housing market. They will also continue to support first-time buyers. In addition, the government called on the RBNZ to consider curbs on interest-only mortgages and to use debt-income ratios. On April 18th, Australia released the HIA New Home Sales for March MoM. They increased 90.3%(!) vs 22.9% in February. Next week they will release New Home Sales for March. However, as with the US, the RBA is in no hurry to raise rates and low interest rates should continue to spur demand, and therefore prices. In Canada, new home starts rose 21.6% in March to a record high of 335,200 units! The new house price index rose to 112.3 in March, the highest reading ever! (One thing Canada has on its side though is that at least the BOC has begun tapering its bond purchases).
As the price of lumber continues to rise (input), we should continue to expect the price of housing (output) to rise as well. The question traders need to ask is: When is price so high that demand will subside? Housing bubbles have been a problem in the past (recall the housing collapse in 2005) and are of concern once again. Watch the price of lumber for hints as to when the rise in housing prices may plateau!
Learn more about commodity trading opportunities.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.