Lumber Prices near the Top of their Historical Range

EconMatters's picture

By EconMatters

 

 

You have come a long way baby

 

 

The lumber market has really come off the 2009 bottom of $140 per mbf and closed Friday at $399.80 per mbf on the back of good news out of the housing sector of the economy. 

 

 

The housing sector of the economy led the way in 2012 with record low interest rates, and investors and banks working through the foreclosed inventory, leading to a trending and steady rise in both average home prices and new constructions.

 

Everything related to the housing sector performed well in 2012 from materials to the home improvement and remodeling big box retailers in Home Depot and Lowe`s Companies Incorporated. 

 

Lumber prices getting slightly ahead of themselves?

 

But if we examine the history of lumber prices relative to the strength of the housing sector, lumber prices may be getting slightly ahead of themselves from a valuation standpoint. 

 

 

Lumber prices will probably break through the $400 level on trading momentum alone, but if we look at the charts most of the time lumber prices are south of the $400 level. 

 

The all-time high for lumber prices established in 1993 was just shy of $500 on a spike, with additional spikes of $440 in 1997, and $420 in 2005. So we are now basically sitting at $400 and in spike territory based upon the charts. 

 

I will be watching lumber for some additional upside momentum, and looking for a good entry on a longer term reversion to the mean short in the commodity as I think the risk and reward dynamics are setting up nicely in lumber for an eventual short once the momentum is exhausted. 

 

Cheap capital chasing returns fueling the upside momentum

 

The US economy is looking for all the good news it can get, and housing has definitely improved but lumber prices are pricing towards the best ever levels in the housing market from a comparison standpoint. 

 

I know that a lot of investment capital has moved into anything housing related seeking a return with a bunch of easy access to cheap capital. 

 

As a result prices can move well beyond historical valuation models, and I think they will definitely test the $420 and $440 levels as a direct result of liquidity flows.

 

But from a historical valuation standpoint prices just do not stay for long at these elevated levels, and once the housing euphoria trade loses momentum, prices should fall more in line with historical norms around the $320 per mbf level. 

 

Therefore, the higher prices get pushed up on the crowded investment spike this year, the better risk reward trading setup for shorting the lumber market in the future looking for a high probability reversion to the mean trade. 

 

 

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joego1's picture

The vultures are starting to wade into commodities.

doggings's picture

Got Wood?  - If Econmatters is short, you want it. 

Market Analyst's picture

You mean the 2.5% hit today, you want that right?

http://data.cnbc.com/quotes/%40LB.1

 

CPL's picture

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joego1's picture

It's called fiat money versus something real.

walküre's picture

This too shall pass. The contractors I speak with are not getting any work because lumber prices are prohibitive of either building new or renos. Scrap lumber is all the rage right now. I've helped a buddy take down a shack the other day and we salvaged some decent true 2x4 and 2x6, mostly red cedar.

During the Depression years my father-in-law tells me how they salvaged nails from burnt down structures. They didn't care for the lumber back then.

Kayman's picture

walküre

Unfortunately fire takes the temper out of a nail. 

 I was sentenced to straightening nails by my Depression era father.  Chipping mortar off of used bricks and hammering nails straight. Cruel and Unusual punishment. But then again I was a real little bastard.

ncdirtdigger's picture

Last January gypsum wallboard went up by $.05 per board foot. This January gypsum wallboard went up by another $.05 per board foot. Make of it what you will.

Kayman's picture

ncdirtdigger

Just to give you an idea of what the Bernank and his ilk have done to the purchasing power of the dollar, I used to rail gypsum wallboard out of the G.P. plant in Lovell, Wyoming in the 1970's at $30/Msf; 96 cents per 4x8 sheet.

roadhazard's picture

heh, around here the "crash" only made building materials go up. They have kept going up. If there is no volume charge the poor schmuck that has to have something MOAR.

BurningFuld's picture

Being a BC (Canada) resident and having just sold 3 loads of logs to a mill, I can tell you what the buyer at one of the mills told me......"We are only taking Fir right now and it's ALL going to Japan...all of it."  Something about rebuilding after a tsunami I think?

optimator's picture

Strange.  Last time I sold cherry at big bucks and they wouldn't even look at the fir trees.

ncdirtdigger's picture

It seems that all the wealthy Japanese have finished their rebuilding, and they are just now making their way down to rebuilding the poorer sections of town.

dabullify's picture

There is no economic data here, lumber prices were looking like shit, they spiked on hurricane Sandy. 

 

Stuck on Zero's picture

It's not housing that is driving the price of lumber.  It's wood pulp used in printing dollars.

 

alphamentalist's picture

Not the first time I'll be short wood

Freddie's picture

This should be enough to give the Dow "wood" and cause a 200 point rally.  Commodity inflation/dollar destruction/middle class destruction is bullish!

somethingisrotten's picture

"The housing sector of the economy led the way in 2012" ???????????????

Are you equating rebuilding of weather calamity damage with housing recovery?

These increases in lumber prices are merely Bernanke created stealth inflation just like with food, insurance, etc.

 

duo's picture

$500 in 1993 is like $1500 today.  If you don't know what the dollar is worth, how can you price something real like lumber?

Clycntct's picture

Now you hit the nail on the head.

You have to know what's in the mystery meat.

DeadFred's picture

The spike started with Sandy. I started a major remodel recently and my jaw dropped at the prices. OSB sheeting that was about $7 last year was $13, or would have been if they had any in stock. Ouch!

Kayman's picture

CME SPF down limit so far today.  OSB is controlled by a handful of big players. Bennybucks sloshing around....

walküre's picture

When OSB prices are equal or higher than ply, you know they have a problem.

What's the price of common dimensional in your area? I can pick up 2x4 at 1.88 or .47 a linear ft. Not the prettiest material that's for damn sure.

Kayman's picture

Walkure

I don't know the retail price of much.  China has been buying wood with their Bennybucks for the past few years and they buy lumber the way the old Russian Commies bought wheat; pedal-to-the metal or colder than a witch's tit. So that has to be factured into today's lumber prices.

2x4 SPF is $390/Mbf vs 260 last year, Grn D.Fir $373 vs235 and KD HemFir $420 vs 270. Multiply by .00533 for a stud.  OSB was $193/Msf vs. $425 today. Multiply by .032 to get mill price per sheet. Depending on the mill location to population centers naturally.

Of course, depending on what retailer or wholesale distributor bought what and when, retail prices could be all over the board. Ahem, so to speak.

Clycntct's picture

Recalculate @.235$ a lin  for a 2x4x8' and the 1.88 may be a precut 93+5/8.

I haven't looked for 3 months.

walküre's picture

yes, you're correct.

1x6 is 30 cents a lin

the boards are the killer

otto skorzeny's picture

I went to buy a little bit at Home Desperate the other day and I was shocked at lumber prices.

Ying-Yang's picture

I am long wood

 

Bullish for the housing...... not

duo's picture

It's another excuse for your homeowner's insurance to go up 30%

CheapBastard's picture

condo insurance just soared 12% in my area. Even the real estate dudes on the radio (who endlessly --and shamelessly-- pump RE) are telling people not to touch condos.

otto skorzeny's picture

 the insurance companies aren't making shit on their treasuries thanks to the Ben Shalom so they pass the cost on to the consumer.