Lumber is currently in a bear market, declining 75.8% in value since early last year, but it might not indicate the fate of the real-estate market or the economy.
- Morgan Stanley strategist Lisa Shalett recently warned that the housing market could face a crisis worse than 2008—seeing values precipitously drop 40%.
- “Commercial real estate is melting down fast. Home values next,” tweeted Tesla CEO Elon Musk on Monday.
- In a recent episode of Money Making With Matt McCall, Stansberry Research’s Matt McCall hosted a conversation with portfolio manager and The Lead-Lag Report writer Michael Gayed.
- Gayed warns that Lumber prices indicate imminent economic troubles, stating that Lumber is a key economic indicator that precedes changes in the housing market and new home construction.
- McCall disagreed, arguing that “while lumber may have been an indicator in the past, it hasn’t been the most reliable recently.”
Why It’s News
Gayed is not the first analyst to predict imminent doom for the economy. High inflation and high interest rates have resulted in widespread predictions that the U.S. economy will descend into a recession within the coming months, in addition to facing the negative effects of ongoing housing shortages. The recent regional banking crisis reflected the ongoing effects of the federal government’s monetary tightening policies having negative effects.
There is a connection between lumber’s weakness and the performance of real estate and small-cap companies worth less than $2 billion due to the immediate effects caused by increased construction prices. “Lumber leads the housing market by four or five months, meaning if lumber picked up, you would see the current data reflecting the prior weakness,” says Gayed.
Lumber’s value is continuing to weaken, and predictions for the imminent state of the housing market are trending negative. But a soft landing is not beyond the realm of possibility. With the Federal Reserve slowing its interest-rate hikes, market volatility is expected to cool off. As Stansberry’s McCall notes, some housing ETFs are seeing 15-month highs, reflecting a housing market moving in the opposite direction of construction costs. Demand for housing is not decreasing.
“I have not seen any evidence that homebuilder stocks are predictive of housing. That said, lumber prices don’t make sense. Lumber is a key commodity in new home construction, and homeowner stocks are acting like they’re in a bull market for housing,” says Gayed, who argues that latent COVID-19 anxiety could be contributing to high consumer spending.
This year has been an unusual one for the market, with strange differentials between growth and value and stocks appearing to overcorrect in spite of headline averages. Part of the housing market’s behavior can be attributed to the evolving market, with shortages caused by companies buying properties to convert them into AirBNBs or rental properties—using them as income-generating assets. With demand holding, housing construction may not be a negative indicator for the housing market.
“Not being dramatic about this, but even I’m surprised at how poorly Lumber continues to perform. There is a clear disconnect between homebuilder stocks and Lumber. Lumber has predictive power in housing. I have yet to see homebuilder stocks have predictive power,” Gayed continues.