Ugly Chart of the Day For Home Builders

By John Lounsbury

What is the best proxy for demand in the housing market?  How about lumber.  Here is one ugly chart, courtesy of finviz.com (with trend lines added by the author):
For large graphic without added trend lines, click here:

lumber

Random length lumber started a down trend in 2004, well in advance of the top of the housing bubble.  When a break out from the four year channel finally came in late 2009, it sure looked promising as a leading indicator for an upturn in housing.  The sharp decline in the last two months, steeper than anything since 2004, brings the break out into question.

Random length lumber will be well worth watching this summer.  How well can homebuilders be doing if they are not buying lumber?  If housing is near a bottom, lumber prices should be stabilizing and not experiencing dramatic drops of nearly 50% in two months.  The implication is that demand for new houses is facing a dramatic decline unless the lumber chart turns around.

At the same time lumber has been falling, home builders’ stocks have also had dramatic declines in the past 6-9 weeks.  Here are some examples:  Toll Brothers (TOL) -26%, D.R. Horton (DHI) -32%, Lennar (LEN) -32%, Pulte Homes (PHM) -34%, KB Home (KBH) -37% and Hovnavian (HOV) -51%.  The home builder ETF (XHB) is down 22% in the past two months.

With home purchase tax incentives ending, employment not improving and the stimulus induced bounce in GDP fading, the outlook for housing is dimming.  Lumber may well drop back into the down trend channel.  If it does, those (such as this analyst) who have been predicting that the bottom for housing has not yet been reached, both in price and sales volume, will probably be vindicated. 

10 Comments
  1. Mike Bloomfield says

    There is definitely a correlation between softwood, dimensional lumber pricing and home construction as softwood is used in great quantities for framing, sub-flooring, etc. Softwood is very much a commodity and its pricing fluctuates fairly dramatically as a result. Random length lumber is typically hardwood lumber is primarily employed for interior, decorative purposes. It is typically used for the remodeling of homes, kitchens, and stores as well as the new construction of same. Hardwood is priced by the desirability of species, poplar being cheapest and cherry being three to four times as expensive. Hardwood, random length pricing fluctuates far less than softwood pricing. If this chart is accurate as regards random length (hardwood) lumber, then the economy is in a world of hurt on any number of fronts, not just new home construction.

    1. John Lounsbury says

      Mike – – –

      The random length lumber contract on the Chicago Merchantile Exchange is for softwood lumber. See http://www.financialadvisory.com/dictionary/term/random-length-lumber/

      The definition you refer to is appropriate “in the trade” but is not what the CME contract refers to.

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