Low Rates Trump High Lumber Prices For Now



Lumber prices have gotten a lot of headlines recently, and rightly so. They have been on fire and are causing headaches for people in the housing industry. I highly recommended if people want to know why lumber prices have gone out of control to follow @LumberTrading on Twitter. He really did a good job yesterday on Bloomberg Financial explaining the issue with Canadian lumber, the shortages we have there from a government action, tariffs and the process of how the builders were looking at the recent surge of lumbers prices.




Naturally, when we see this, we think housing is doomed; there is no way that the builders can handle this surge in prices. Well, they can as long as they can pass on the cost. Last month housing starts fell noticeably; some thought this had to be the result of higher lumber prices. As always, I have stressed New home sales and housing starts data can be very wild month to month, and I try not to read too much into a headline. Follow the trend.


From Census: https://www.census.gov/construction/nrc/pdf/newresconst.pdf


Housing Starts
Privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,739,000. This is 19.4 percent (±13.7 percent) above the revised February estimate of 1,457,000 and is 37.0 percent (±15.2 percent) above the March 2020 rate of 1,269,000. Single-family housing starts in March were at a rate of 1,238,000; this is 15.3 percent (±17.4 percent)* above the revised February figure of 1,074,000. The March rate for units in buildings with five units or more was 477,000.




Housing Permits also rebounded. I still believe we will see moderation in this data line. You can get some real wild swings in housing permit data but the trend looks good here.

From Census:

Building Permits
Privately-owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,766,000. This is 2.7 percent (±1.7 percent) above the revised February rate of 1,720,000 and is 30.2 percent (±1.8 percent) above the March 2020 rate of 1,356,000. Single-family authorizations in March were at a rate of 1,199,000; this is 4.6 percent (±1.9 percent) above the revised February figure of 1,146,000. Authorizations of units in buildings with five units or more were at a rate of 508,000 in March.




My best advice has always been the same.

To keep housing data very simple. Always track the monthly supply data for new homes. This has always been my number 1 data line. This was the key data line I used in the previous expansion to prove my case that housing would have its weakest recovery ever from years 2008-2019. However, the years 2020-2024 will be different.

Don’t forget these metrics for the new home supply.

4.3 months or lower, life is good.
4.4 – 6.4 months, life is ok; need new home sales to grow.
6.5 months and above, builders will pull back.

Currently, inventory on a three-month average of 4.16 months of supply, so it’s looking good.
Remember, this data line has big headline moves and has noticeable revisions. Revisions are always key when tracking new home sales and housing starts.



The monthly supply being this low explains why the builder confidence is still high for now. This data line should moderate in time as well. Try not to look at the HMI data as confidence vs. total housing starts. We are obviously are well below the housing bubble years in terms of housing starts and new home sales, and this index hit an all-time high recently. However, look at this as just a month-to-month tracker of how the business is doing. 

From AdvisorPerspectives:
https://www.advisorperspectives.com/dshort/updates/2021/04/15/nahb-housing-market-index-builder-sentiment-inches-up-in-april



All in all, a good report but do remember this. One of the reasons why I don’t believe the U.S. can have a housing construction boom unless they deficit finance it is that higher rates do matter for this sector more than they mean for the existing home sales market. For now, rates are beating lumber, but rates can’t stay low forever. Don’t forget that 4.75% -5% mortgage rates created a supply shock in the new home sales sector, sending their stocks down 20% – 40% from recent peaks back in 2018. Just keep an eye out for this in the future.



Enjoy the weekend folks!

Logan Mohtashami is a Lead Analyst for Housing Wire, financial writer, and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami, now retired, was a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987.