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Lumber’s Surge Says Home Prices Could Gain Even More

Lumber’s Surge Says Home Prices Could Gain Even More

Lumber prices are up more than 370% in the past year. This rapid gain came as demand increased while supply failed to keep up.

The limited capacity of sawmills determines supply. Higher prices are the market’s reaction to sawmills being unable to increase output for now.

Lumber is needed to frame and build new homes. The price surge means that the cost of building a home is significantly higher than it was a year ago.

Analysts estimate that at current prices, an average new home uses $23,700 worth of lumber. A year ago, that lumber cost just $4,972.

As builders take deliveries of high-priced lumber, they will need to raise selling prices over the next few months to maintain profit margins.

How Lumber Prices Can Point to Inflation

While the surge in lumber is already making homes and furniture more expensive, lumber is far from historic highs by one measure.

Lumber priced in gold is more than 40% below its all-time highs. This is shown in the middle of the chart below.

Tracking the Changes and Effects of Lumber Prices

(Source: Optuma.)

Pricing commodities relative to gold can account for inflation.

In the very long run, gold has provided protection against inflation. Comparing the price of other commodities to gold shows how that commodity reacted to inflation in the past.

Using futures prices, lumber has frequently traded for more than gold.

This was seen in the high inflation of the 1970s. It happened again 20 years later. High lumber prices in the 1990s were due in part to tariffs imposed on Canadian lumber imports.

Changes in home prices have lagged changes in the lumber-to-gold ratio.

The bottom of the chart shows the annual change in home prices. Homebuilders seem to respond slowly to changes in lumber prices. Home prices peak after that ratio begins falling.

If that pattern holds, then we can expect home prices to continue moving higher until after the lumber-to-gold ratio turns down.

Regards,

Michael Carr

Michael Carr, CMT, CFTe

Editor, One Trade

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