What does lumber tell us about housing prices?

As the price of lumber continues to rise, we should continue to expect the price of housing to rise as well.

Uptrend 4

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, City Index

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.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.