Builders Beggar Belief As Lumber Liquidation Looms

With lumber prices plunging to fresh 3 year lows, the divergence between homebuilders and the most economically-sensitive commodity is starting to suggest a rather scary case of deja vu all over again.

 

4-Step-Deja-Vu...

Chart: Bloomberg

Step 1: Homebuilders rally but physical lumber supply limited sparks boom in futures prices... mills restarted, mal-investment invested, supply surge, demand met...

Step 2: Same again... but this time there is already supply so the brief futures spike in prices fades as the market realizes that the move in builders was not really reflective of actual development demand...

Step 3: Massive over-supply meets under-demand driving lumber prices to collapse... builder remain buoyed by financial-engineering, Fedspeak, and algos hair-triggers on NAHB surveys...

Step 4: Homebuilder catch up to the ugly reality that there is no recovery...

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As @Not_Jim_Cramer shows, this move in Lumber suggests forward returns for homebuilders will not be as exuberant...

 

and that macro-economic data will greatly disappoint...

 

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Of course, it could be different this time... just the weather... Or Not!