Date: 4/19/2021
Author: Mr. X
It’s supporting the soaring real estate market, one of the most important economic indicators there is. It’s up beating out powerhouse stocks like Apple [AAPL]. In fact, trading in it was halted recently because its growth was too explosive.
Is it 5G technology? Biotech featuring mRNA? Wait, private space companies?
Nope. It’s literally wood.
The Chicago Mercantile Exchange paused futures trading in lumber trading recently. According to the National Association of Home Builders, lumber prices have increased more than 180% since last spring. Last week, the price of lumber per thousand feet rose to an all-time high of $1,048. That’s more than a half ounce of gold.
It’s estimated that the increase in lumber costs have made building a new home $24,000 more expensive than it would have been one year ago. If you bought some land, you might want to hold off on building. If you’re on the fence about selling your existing home, you may not see a better market than this one. (And if you don’t even have a fence, maybe wait to build that too).
America is still facing a housing shortage. Even with this large increase in construction costs, new-home construction in March 2021 was up 37% compared to the year before.
We may be in a position where over the next decade, commodities actually outperform stocks. Yet there are still ways for investors to participate in this market surge besides investing in commodities directly.
The iShares Global Timber & Forestry ETF [WOOD] is up almost 95% over the last year.
Another ETF with a clever name, NAIL, the Direxion Daily Homebuilders & Supplies Bull 3x ETF, is up an astounding 719.91% over the last year. That’s even after eating a 2.35% loss on Monday.
Specific companies are also booming. Louisiana Pacific [LPX], which helps design and manufacture homes with both wood and oriented strand board (basically processed wood), jumped over 300% last year. West Fraser Timber [WFG] has done almost as well, just over 280%.
The obvious question is whether it’s too late to move into this sector. There are some reasons to think the boom may be over.
No fewer than 37 organizations are demanding the Commerce Department find ways to bring down lumber costs. Lumber companies who respond, “No, please help us keep this product at a high price” probably won’t get an eager hearing. The government will almost certainly try to suppress the price.
It’s also worth noting that the lumber shortage is similar to that in semiconductors – market expectations and supply chains were disrupted by COVID-19 and so there is a temporary disparity between supply and demand. It will fade with time.
Finally, the Biden Administration’s infrastructure bill (which has very little to do with actual infrastructure) includes financial incentives for localities that eliminate zoning laws. This would allow apartments in areas once restricted to single-family homes. If the “American Dream” is no longer a house and a white picket fence, that will drag down lumber costs.
Yet there are still reasons to think the bull market in lumber has room to run. Freddie Mac says that the country is 3.8 million single-family homes short of what’s needed – a 52% increase in the home shortage rate compared to 2018.
More broadly, the demand for single-family homes is also getting a push from the pandemic. Remote working is making the need to live in a city less important. Thus, relatively wealthy workers are moving to more rural areas, dividing sprawling acres of farmland into large single-family homes. You might even be seeing this where you live, where there is a boom in construction and a reduction in green space despite rising costs.
With immigration continuing, and even accelerating under the Biden Administration, there will simply be more people who need housing. With interest rates low, most Americans won’t find loans very intimidating.
Finally, there’s the decline of the American city. As said earlier, its economic necessity is no longer there for many people. Crime is rising in many cities nationwide. Urban unrest and protests are rising too. This might be an off-color observation, but I can’t help but think there’s an increased demand for lumber partially because businesses need to keep boarding up their windows.
The Biden Administration and many other groups want people to live in apartments, but this push is coming at a time when many Americans want to get away. It’s not just that there’s a housing shortage, it’s that people want single-family homes. They’ll take an apartment, but only as a stepping-stone to something with more space. After all, if you work via Zoom, why bother paying more per foot living in a city? Even a townhome with a small yard seems like a mansion after an overpriced apartment. Witness the wholesale flight from once fashionable cities like San Francisco.
I don’t think the lumber boom is over, though it may slow down. I also think this entire sector shows something of fundamental importance to our economy.
As we’ve learned with the semiconductor shortage and the emerging American-Chinese economic cold war over rare earth minerals, materials still matter. The new economy won’t just be “in the cloud” or something conjured up by the “creative class.” Wood, food, copper and other concrete goods are still what the economy is built on. Land will also be important once construction costs gradually decline – and perhaps even if they don’t.
We’re still on a planet with an exploding population. And the promise of globalization is falling to the realities of geopolitical competition and powers looking to secure autarky, at least for key resources.
Don’t overlook commodities while scouring technology newsletters for the next big thing. Get out in nature while you still can. Help the planet and plant a tree. And if that sounds too sentimental, tell yourself it’s an investment. If present trends continue, it’s better than a bond.
