Part Three in the Save Money Series
I certainly do not have crystal ball, but I do have something almost as good. I have history and the ability to analyze the market from a fundamental and technical perspective. Together they provide an 86% accurate forecast of when prices will rise and fall. This should help protect you from under bidding and being out of position with inventory.
Reviewing the Data
So let’s evaluate the projected price range for 2x4 #2 in 2017 using the futures market. On the long-term monthly continuation chart of the nearby futures contract, the first thing to see is that, since 2004, we have created a narrowing pennant or wedge formation ...lower highs and higher lows.
Currently, we are rallying up to the top of the wedge towards $375-ish. The bottom of the wedge is $240-ish. That is a $135 trading range. The current value of lumber futures is $310…$65 from the top…$70 from the bottom. We are right smack dab in the middle.
Preparing Your Action Plan
So, what can you do with that? First, realize that all 2x4’s #2 prices are well above 10-year averages and about $50 higher than last year this time. SYP 2x4’s, the primary specie for component manufacture in over half the country, are $132 over the 10-year average and $15 above the highest January price over the last 10-years. Big picture, lumber prices are high and moving upward.
I expect framing lumber prices to move to the top of the wedge before the bottom. The Softwood Lumber Agreement and Trump-onomics could keep our lumber market spooked at these higher prices well into the spring. If the top of the wedge holds, we could be in for a nasty ($135) bear market to follow. My strategy would be to anticipate $50-75 higher prices the first half of the year then begin a move lower into the fall.
Another Dimension
A Special Update from Layman’s Lumber Guide
Higher Interest Rates…Running 2x4's Above $500
We have discussed this in the past and now it is upon us. Higher prime interest rates mean higher mortgage rates. Higher mortgage rates, both bottoming and trending, regardless of how high they are, are bullish for housing...particularly under 6-7%. Why? Fear of higher interest rates. When rates are low, trending lower, or stuck in a flat range, home buyers are not motivated by that fear of higher rates. In mid December, mortgage applications rose by a whopping 25% in one week. This home buying flurry will be good for housing in that it will strain an already lean inventory. In turn, builders will crank it up this spring and summer.
What does that mean for our lumber market? It means the first half of 2017 is going to be wide open. Housing starts, particularly single family, will rise to meet the mortgage rate- induced buying flurry. Multi-family will lose favor, claiming a smaller share of the market. The closer we get to another rate hike, housing will feel like it is in the midst of a buying panic. The seasonally adjusted housing start pace will likely spike to 1.5-1.7 million by late spring, being skewed by the mini-panic.
Lumber, specifically truss stock, 2x4 #3, #2, #1 and all structural grades including MSR, are going to be in tight supply. Prices, particularly SYP 2x4's, are going higher well into the spring.
At this point, producers have no plans to increase production. By the time they realize what is happening, 2x4 #2 SYP will be approaching $550/mbft FOB mill on the eastside (Virginia through Georgia) and $500 at westside mills (Arkansas, Louisiana, Texas). Other species' structural 2x4’s will also be scarce through the spring. Speculative buying will exacerbate the problem.
The second half of the year will not be as generous. Lumber and other building materials prices will make home prices be a deterrent.
***WARNING…Share this with your builders so they can prepare and not come banging on your door when your framing packages and trusses are the highest they have ever seen.
A veteran lumberman, Matt Layman publishes Layman's Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.org.