Lumber futures prices are in backwardation, suggesting more upside is possible, and a booming housing market does help
Last Friday, the US housing data for March showed a performing sector.
The COVID-19 pandemic triggered one of the most interesting shifts in consumer behavior: the population fleeing cities for the countryside. Consequently, the housing market is booming, and — according to real estate agencies — houses are typically being sold less than a week after being listed.
It should come as no surprise that the lumber price has risen to reach $1,000, and the futures market tells us that it could go even higher.
March 2021 Housing Starts Beat Expectations
The housing market is crucial to every economy, as evidenced by the fact that the 2008-2009 global financial crisis started with the US housing market. Younger investors might not know this.
The US housing market is booming again. With more building permits issued in March (1.77 million vs. 1.72 million in February), the upside is likely to continue in the months ahead.
Local horizontal industries thrive as people buy furniture during a housing boom, not to mention the timber used in the construction of houses. It should come as no surprise, therefore, that lumber prices rose during the pandemic, and there is no sign of a slowdown.
Commodities are traded on the derivatives market, where the futures prices are marked to market daily by clearinghouses. Currently, the lumber futures prices are in backwardation, meaning that the spot price exceeds the futures price as the asset is in higher demand than the contracts maturing in the coming months suggest.
As long as the futures curve doesn’t change, lumber prices should keep going up.