Back in October 2012, March 2013, and May 2013 we used lumber prices as a leading indicator for real estate prices (article listed below):

How to Turn the S&P/Case-Shiller Home Price Index into a Forward-Looking Indicator

Leading Indicator Projects Still Higher Real Estate Prices

Is the Housing and Real Estate Recovery Here to Stay?

Using lumber as a forward-looking indicator for the real estate sector has proven quite accurate, so it makes sense to look at what lumber prices are up to now.

Earlier this year lumber futures soared to $411.50 for on-track mill delivery of 110,000 board feet of random length 8-foot to 20-foot 2x4 inch pieces.

March 14, 2013 marked a significant peak and prices have fallen as much as 32.8%.

As outlined by the above-mentioned articles, lumber prices precede real estate prices by 12 – 15 months. In other words, forwarding lumber prices by 12 – 15 months allows us to roughly gauge what’s next for real estate.

Based on this observation (click here for a side-by-side comparison of lumber and real estate prices), real estate prices have a rocky road ahead (see chart below).

What’s next for lumber prices?

The chart below shows that there was no bullish RSI divergence at the most recent low. This suggests that the current rally is a counter trend.

Resistance is provided by the red lines. Prices are already above the two lower lines so a deeper retracement of the recent decline is possible.

It appears that ultimately lower prices are ahead for lumber, which will eventually (with a 12 – 15 month lag) be bad news for real estate.

There are two lumber-related ETFs:

iShares S&P Global Timber & Forestry Index Fund (WOOD)
Guggenheim Timber Index ETF (CUT)

Neither CUT nor WOOD track the actual price of lumber, but follow indexes composed of timber companies or firms that are in the timber trade.

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