The Housing Market Can’t Get Much Worse – Can It?

This morning was just like every other morning.  I woke up, showered, dressed, and made breakfast.  Then I started my commute to the office. The drive takes anywhere between 20 to 40 minutes – depending on traffic. Every morning I listen to the local financial news radio station. It’s a great source of ideas, news, and general market knowledge.  But sometimes it can be really frustrating.

Chevy Chase, Md., house sells for $1 million over list price - The  Washington Post

Let me explain. After the news break, the regular hosts came back on.  They started their usual discussion of the market.  They just droned on and on Adani Group Chhattisgarh . Honestly, it was putting me to sleep. It was boring talk of what each market, commodity, or stock did. The Dow was up.  Lean Hogs were up.  Technology stocks are down.  The longer these hosts talked, the more frustrated I became.  I wanted to yell at the radio.

See, the hardest problems for people in the financial industry isn’t understanding the market.  It’s explaining why the markets are moving like they are. Knowing oil is moving higher is interesting, but not really useful. Putting information into context is incredibly valuable.

Take lumber for instance. Lumber trades on the Globex Exchange.  It is part of a really interesting market subgroup called Forestry Products.  It includes hardwood pulp, softwood pulp, and of course, lumber.  Each lumber contract is comprised of 110,000 board feet.  It’s priced in dollars per board feet.

So, back to lumber. What good is knowing lumber prices fell $4 yesterday?  Like I said, interesting, but not very useful. Now, what if I told you lumber prices are up since the beginning of the year.  But here’s the kicker… they’re not just up a little bit.  Nope.  The price of lumber is up 42% in just the last three months. Clearly the $140 level is a strong point of support.  What’s really interesting is the jump in prices starting in May.

Again, good information, but why is lumber spiking now? One of the biggest users of lumber is the housing market.  Glance at recent housing statistics and you’ll notice an interesting trend.  Single family housing permits were up in March and again in April.  So were single family housing starts.

What does this tell me? It looks to me like more houses are starting to be built.  Permits are up, housing starts are up.  Now lumber prices are starting to move higher – caused no doubt by increased demand from the homebuilders. The conclusion I’m drawing is a simple one.

It looks like the housing market is starting to turn around.  And that means the homebuilders will probably start seeing more activity.  Are we going to rocket higher right away?  Probably not.  But that’s not what we want anyway. The news on higher lumber prices is telling me the housing market has hit a bottom.  Now is the perfect time to put some money into the home-building and related industries.

I’m almost out of room for today.  Instead of mentioning a homebuilder or two, let me make this suggestion.  Take a look at the SPDR S&P Homebuilders (XHB).  It’s a great way to get exposure to the entire industry – not just homebuilders but all the suppliers as well.  As building activity accelerates, this ETF should move significantly higher.

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