LUMBER FUTURES SURGE BEFORE HOUSING’S LAST GASP

Lumber futures have surged nearly 60% since the beginning of October despite mixed signals in recent housing data (read Mike Farrell’s must read housing comments here).  Random Lengths recently reported the continuing substantial weakness in housing as lumber production declined 23% vs 2008:

U.S. lumber production through November totaled 21.205 billion board feet, down 23.0% from the January-November 2008 figure, according to the Western Wood Products Association. Through the first 11 months last year, production in the West declined 22.3% compared to the same period of 2008; production in the South fell 23.7% during the same period. Nationwide, November 2009 production totaled 1.620 billion feet, down 16.6% from the November 2008 total and off 18.9% from October 2009.

Despite this, lumber futures hit 29 month highs last week as buyers anticipate the strong Spring building season.   Lumber distributors have been forced to restock supplies as builders anticipate another strong Spring housing season largely due to the home buyers tax credit which ends April 30th.

Lumber futures are notoriously seasonal and this year’s price action likely points to strong demand in the housing market.  While this bodes well for the near-term action in the real estate market it could also very well be the last gasp before the stimulus begins to run dry.

While we believe housing markets could show signs of life this Spring we continue to think the recovery in housing is almost entirely stimulus based and the long-term bear market in housing is still very much alive.  The laws of supply and demand have been temporarily lifted as the government attempts to price-fix a broken market.  In the long-run, however, the market is likely to return to its negative trends as the second round of mortgage resets and inventory overhang impose their will on a still very fragile U.S. consumer.  All of this adds up to a potentially bullish H1 in housing followed by a potentially treacherous 2011.