Summary:
It was another slow week in both futures and cash. As we search for answers, we just may not be asking the right question. The question is if demand is our problem. The data isn’t showing it. Reports from the field aren’t showing it, but this industry’s general malaise today is not typical. All the other sectors of the economy experienced covid interruptions, as did lumber. They have all cleaned up logistics issues allowing for lower prices. So why have most other sectors experienced a pick-up in demand from the lower prices while lumber has not? There is a key headwind from this malaise. This industry has an extremely slow-moving cycle where most others don’t. This lagging grind may just shift the cycle. Today we are in a positive upcycle. All the dynamics are still in place, but the shift may be quietly developing. This is a big call. This rolls the homebuilders and producer’s stocks to a sell. Let’s dig into the factors at risk.
The most apparent today is rates. They have become much stickier in the mid-6 % range than expected. Yes, builders are buying the rates down today and yes, they won’t stay high forever, but it may just hang high enough to change the buyer’s attitude. Today there is a much smaller percentage of first-time home buyers in the market. The doubling of rates has forced them to the sidelines. High median home prices also have hurt. They are on the sidelines not out of the market. If unemployment starts to creep up and there are job losses near the entry level, they may just change their way of thinking. You lose that core group, and you lose the market.
Another issue today is the fact that about 35% of new buyers were funds and spec groups buying and either renting or selling the homes. You think of names like Blackrock who have been very active in this sector. With rates on the rise, their participation has dropped substantially for the 2022 highs. Higher rates limit profits and increase risks. Now if rates do start to fall it will become a viable investment again, but here is where the long lag could hurt. The longer the lag the more likely they will develop another investment for the money and move away from home buying.
I’ve been talking about the “sweet spot” for the buyers. That’s said to be a sub-5 % mortgage and a $350,000 home. That is what the new buyer can afford. If you move this out 3 to six months, the equation moves from what they can afford to what they are willing to pay. That psyche shift will have a long and negative effect on home buying.
The housing industry needs to find economic confidence. It doesn’t look as if that can be created in the near future. Not when the discussion focuses on when the recession will hit.
Technical:
The read continues to be one of a neutral call. The 513.50 area on the upside is still in play as is the 485.00 support. There hasn’t been much movement but when there is the market runs up and then makes a new low. The stochastics have done a great job of calling this type of trade. It is still showing a bearish tone. There are no indicators supporting a directional move development. Old school tells us that lumber doesn’t stay sideways for that long. I’m guessing that the market will either see the low 480’s or the high 5teens this week. Enjoy the week and the beautiful weather.
Lumber Futures Volume & Open Interest
CFTC Commitments of Traders Long Report
https://www.cftc.gov/dea/futures/other_lf.htm
Lumber & Wood Pulp Options
https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf
About the Leonard Report:
The Leonard Lumber Report is a column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.
Brian Leonard
312-761-2636
