Lumber prices have made quite a comeback this year, climbing by 25% in January and nearly erasing the decline suffered in 2018, as the market gets a boost in demand ahead of the spring building season.
Looking ahead, however, analysts urge caution. The lumber market looks overbought and bears some similarities with last year, when prices rose to an all-time high and then dropped.
“We can see continued price appreciation, but in order to be sustainable, it must have the underlying support of real demand in the form of housing starts,” says Greg Kuta, an analyst and president of Westline Capital Strategies.
Lumber futures LBH9, -1.27% settled at $424.50 per 1,000 board feet on Thursday. They rose 25% in January and, as of Thursday, trade nearly 28% higher year to date. The SPDR S&P Homebuilders exchange-traded fund XHB, -0.41% has seen a more modest gain of 14% for the year so far.
“The market has a seasonal tendency to bottom out into the middle of January as buyers begin to accumulate in anticipation of their upcoming spring needs,” says Kuta. Still, he adds, “I don’t think anyone…is willing to wager a guess on what business will look like behind the impending spring needs. This has a very similar, eerie feel to rebuilding last year’s house of cards with recent appreciation of lumber prices.”
Walter Zimmermann Jr., chief technical analyst at interdealer broker ICAP, has a more dire view from a technical perspective. “Lumber has ‘bear-market correction’ written all over it,” he says. Futures prices dropped from an intraday high of $648.50 to a low of $299.90 last year, according to FactSet data. The drop “was not the pattern of a completed bear-market correction. It was a pattern typical of the initial leg down in a larger decline.”
Lumber was in short supply early that year, in part due to U.S. duties on imports of lumber from Canada that led to tighter supplies.
“Delayed railroad shipments from Canada last spring in tandem with the already low inventory levels in the field caught the industry flat-footed as they ran to the door all at once in accumulating their spring lumber needs, which resulted in the explosive, historic highs in the lumber cash and futures markets,” Kuta says.
A “historic collapse in pricing” followed, as actual demand following the initial spring purchases “didn’t materialize to keep pace with an increase in production,” he says.
Now, as prices head higher again before the spring building season, Kuta says, “there is less demand to absorb the excess production that came on last year as a result of historic lumber prices.” At the same time, “ongoing structural issues facing housing,” including labor shortages, lack of entry-level homes, high land costs, slowing economic activity, and equities potentially topping, “have taken a serious toll on growing housing in the U.S.”
U.S. housing starts were at a seasonally adjusted annual 1.256 million rate in November—3.2% higher than a downwardly revised October figure, but down 3.6% from a year earlier.
Read: Housing starts are on hiatus. Here’s the next best thing.
Aside from all of that is uncertainty surrounding China’s lumber demand, as talks between the U.S. and China to reach a trade deal continue.
As an alternative to futures, traders can look to some home-building stocks, which have outpaced the S&P 500 SPX, -0.31% because of the pullback in interest rates, says Adam Koos, president of Libertas Wealth Management Group. Home builders include D.R. Horton Inc. DHI, -2.43% He also suggests large-cap materials stocks Home Depot Inc. HD, -0.37% and Lowe’s Cos. LOW, -0.08% as well as Armstrong World Industries Inc. AWI, +0.24% and Lennox International Inc. LII, -0.49%
Lumber prices could trade in a $325 to $510 range over the next year, Kuta says, with the “demand component becom[ing] much more critical in determining the future health of U.S. housing and its ability to see upward growth.”