Category: Housing

Seems like all the focus is on cutting supply. Is the supply risk real? Yes, the risk is real: current economic conditions in this industry could force closures. Yet, with all that risk, January futures still closed down $8.50 for the week. So, who is selling it down here?

First, it is industry longs who simply can’t take it anymore. Next are the commodity funds. Yes, they are rolling positions, but they are also adding. Remember, their design is to hold X amount of positions with Y dollars in the account. When the market moves in their direction, they add. They don’t have more information than the industry; they just trade more aggressively.

And when their position goes against them, they will pare it. Remember that.

By Friday, the futures market seemed to be dug in, especially in the November contract. Despite the drop in print, the trade is more reluctant to be short after the WF earnings and shutdowns. “Where there is one, there is normally more.” There wasn’t any activity on the cash side. It was all on the futures side and reflected the trade’s reluctance to be short.

The housing industry dances to its own tune. Outside influences might slow a trend, but they won’t stop it. The entire industry is backing off going into the end of the year. Between the elections, Iran and crude, rates, and the stock market, no one has a clear view of future demand. That’s why the focus is on supply. One thing my buddy Jay used to say is that when all the wood is sitting at the mills, prices go up. Let’s hope.

Recap:

It was another miserable week in both futures and cash. The rallying cry for the fourth quarter is, “If we can only break even.” Hell of a way to run a business.

The proactive stance this year was to have inventory when things spiked. That strategy drastically cut into margins. The fact that product never got cheap enough to help navigate the trade is likely to continue through the rest of the year.

That same scenario does not appear on the futures side. Futures have fallen sharply and are starting to look at the 2025 lows as an objective. My guess is that we don’t get there, but it needs to be said for affect.

There really is no reason to spend much time on the demand equation when the 30-year mortgage continues to make new highs. Coming into the year, there was an argument that the affordability issue could ease with a 5% or 5.5% mortgage rate. That argument is gone now. The reality is that even builder buy-downs are doing little to stimulate interest.

There is a real disconnect. In 2025, we averaged 909,000 single-family starts. In August, single-family starts were running at a 918,000 annualized pace. The market is stable, and that takeaway is keeping cash prices higher than most want, but still lower than the mills can stand.

Futures, on the other hand, perceive more of the same. That kills any upward momentum. Thus the disconnect: cash prices are higher than expected while futures prices are lower than anyone wants.

Summary:

Look for the futures market to offer little, but what it does offer should be more upside movement than downside. Today, the 515 low and the 2025 low of 496 are just rounding errors in the macro picture.

We are in the camp that the producer side can exist under these conditions—and by conditions, I’m talking about another three quarters of losing money. The loans will run out, and reality will force many hands. That tension alone should slow any sharp selloff in futures.

At this point, there aren’t any basis or forward opportunities, only risk management. If you own wood, hedge a percentage on any spike. It doesn’t matter if you’re hedging a loss. You are buying time.

Daily Bulletin:

The Market:

I have to lead with this fun fact. The Sept-Nov roll traded as high as +22.40. It started around -20 in early August and spent all of September positive.

Open interest in the short fund category jumped 396 last week. At 6,605, that is the most we have seen in months. The roll starts next week and will probably continue right up to expiration.

If you paid -17 and it only gets to -7, you pick up $10. When was the last time you made $10 on a car of cash? I’m just saying……

The focus is on the 10% reduction and the roll. Most likely, neither will have much effect on cash or futures. Put those to rest and move on.

Friday was a short-covering day on light volume. Nothing more and nothing less. That said, when you move that sharply there is always a chance for some nervousness and follow-through.

The technical read has a few positives now. On a weekly basis, closes through 546.70 and 552.00 would actually add some momentum to the buy side. With the stochastics nearing a positive cross, there is some upside room, but those levels need to be crossed first.

On the daily, the read is more positive in real time. The stochastics have crossed to the positive. We also saw the industry adding longs as the market broke.

A bottom is trying to form.

I’ll end with this. On Thursday, November futures hit $515, or roughly $393/mill. That is not sustainable. The industry stepping up to buy confirms the thought process, but when it is only the computer trading, the computer wins.

Daily Bulletin:

Week Recap:

The November futures fell $33 on light volume. The one feature of the week was computer-like selling in most sessions after expiration. What became apparent was that the pre-expiration rally was liquidation-driven. Once that was complete, the downward trend continued. Open interest fell by about 800 contracts. November futures are now down $120 in 43 sessions.

Market make up:

The producer side has 5,305 longs in place and 439 shorts. Yes, the industry is not short. The funds are short 6,066 contracts. We see a limit to how many shorts they are willing to carry, so much of the selling late in the week was most likely algorithmic in nature. We are also seeing a marked pickup in swap trades for this contract.

I would note that open interest remains high despite the lack of trade. There is no discount and no premium. Today, the only thing being offered is cheap and cheaper. There will be a rather large roll. The question is where it starts from.

Funds:

The funds remain very difficult to track. We know that interest rates, the dollar, and other economic factors all play into the equation. What we do not know is how they are positioned in other commodities, nor do we know their true capacity. The futures market rallied to $660 because they were exiting positions and fell to $536 on Friday because they continued to add shorts.

In trading-floor lingo, we blew them out, and now they are back with a vengeance.

Summary:

The discussion around the funds has little to do with why November futures settled at $537. The market settled at new lows because the housing market is sputtering just as mills are ramping production back up following summer shutdowns. Over the last few years, demand has remained relatively consistent. I believe the healthy premium in the futures market encouraged buyers to step up more aggressively than necessary. Today, that advantage is gone, leaving buyers strictly hand-to-mouth. Add a modest increase in post-shutdown supply, and the result is an imbalance. There is little appetite for risk in this environment. The trade will buy when it needs wood, and it does not matter if they have to pay up. At this point you have to create value in the futures market by going to a premium or discount. That could take time. 

The futures market dug itself out of the hole last week with a little help from the funds. The start of the roll slowed the computer selling, allowing the futures market to breathe. At 13%, the market was going to correct, it just needed a nudge.

On Friday, the final count for fund shorts hit 5,000. That was pre-roll. The funds did about 2,000 spreads last week, so there is more to go.

Please remember that the buying of the front month and selling of the second month is not a guaranteed rally. It just hit at the right time.

Looking at the trade on Thursday and Friday, we saw the selling become more vigorous. Open interest increased on Friday, confirming additional computer selling. The industry is not getting ready to buy anytime soon.

The next factor we have to worry about is the EFP market and whether there is any value there.

There was another dustup in the Jackie Gleason/Art Carney relationship. Needless to say, like wars, fires, and duties, unless it hits at the low, no one cares.

I was hoping that the funds would buy back some of the positions outright. That hasn’t been the case yet. The good news is that some cash items have stopped going down. It is back to a grind. 

Technical:

Sept futures cleared through most of the noise early in the week only to fall back into the middle by late Friday. With 5,700 industry longs, creating upside momentum is difficult. Having at least 80% of those longs offside also limits buying.

The market keeps developing wedge patterns, usually a sign of a sideways market. Today, the key support and resistance points are 582.00 and 567.50.