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Will Lumber's Decline Continue To Boost Home Builders?

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Will Lumber's Decline Continue To Boost Home Builders?
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"Ahh, home crap home" – Tom Hanks as Walter Fielding, The Money Pit (1986)

It seems to reason that when lumber prices are dropping, home builders become more profitable and their stock prices perform better.

On October 6 of last year, lumber prices stood at around $350.20 when they started to fall precipitously. The drop in prices has continued for the last five months, and through Friday's close are down about 20 percent during that time.

Meanwhile, the SPDR S&P Homebuilders (ETF) (NYSE: XHB) has been on a sweet run. XHB was sitting at $28.02 on October 13, started to rally a few days ahead of the broader market rebound, and is up 26 percent over the same five months. That number was above 30 percent, but home builders have given back about 5 percent or so in part due to the broader market struggles last week.

Even though the stock market was skittish Friday with concerns over a pending rate hike, the fundamentals for homebuilders continue to look solid.

Friday's jobs report showed another 295,000 people were hired in February, the 12th straight month with more than 200,000 new jobs. The unemployment rate also dropped to 5.5 percent, its lowest level since 2008.

Housing starts were down 2 percent in January given the severe weather conditions, but pending home sales reached their highest level since the summer of 2013 and are up 8.4 percent year over year.

Interest rates are also still at historical lows and the Spring selling season is upon us.

So, what then with lumber prices?

During a drop like this, how do prices typically react in the next month? 

EidoSearch found 34 similar instances of the current 3-month price trend in Lumber's history, dating as far back as 1983, and Lumber prices are up 73.5 percent of the time in the next month and the average return is 5.5 percent with almost 8x the upside to downside.

One month forward projection for Lumber (LS):

ls.jpg

One month historical returns for the 34 most similar instances of Lumber's current 3 month price trend:

ls2.jpg

Image credit: Sean Mack, Wikimedia

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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