Housing is very important to the overall economy and a robust housing market is a huge driver of growth. Last week’s housing report was better than expected. Housing starts in the U.S. jumped 20.2% in April and building permits were up 10%. Additionally, single-family housing starts rose 16.7% from March, and 15% when compared to April 2014. Furthermore, mortgage applications were up an annualized rate of 90% over the past 13 weeks. All of that sounds great. It should then follow, given the robust growth in the housing market, that lumber prices would be increasing with increased demand. Actually though, we have seen the exact opposite.

Lumber prices are obviously an important factor to look at when it comes to housing. However, due to environmental controls, the supply of lumber is normally pretty constant even when demand is increasing, unlike other commodities. For instance, you won’t see clear cutting of forests when lumber prices increase. Again, this is due to environmental regulations specific to the lumber industry which limit supply regardless of how strong demand might be.

So, how has the price of lumber fluctuated in 2015? When looking at the chart below, one can see that prices fell by more than 23% earlier this year. It has bounced back with the recent positive housing report, but it is still remains down more than 18% for the year. If things are really so great in housing, one would expect the price of lumber to be much higher this year, not lower.

So what is this divergence telling us? If lumber is priced appropriately and remains lower for the foreseeable future, it is telling us that housing is not nearly as strong as the headlines suggest. On the other hand, if the housing numbers are accurate, lumber prices are too low and one should expect a jump in lumber prices in the weeks ahead. These are the only two outcomes to bring it back in balance. However, since lumber prices typically tend to be a leading indicator of the housing market, a bet on a robust housing market might be premature.

Interesting Fact:

Currently, there are 82 apartments in New York City that are renting for $50,000 or more per month – this is triple the amount of high priced apartments listed in the first quarter of 2008.

Book of the Month – Money – How the Destruction of the Dollar threatens the Global Economy and What We Can Do about It, Steve Forbes

Steve Forbes has one of the sharpest financial minds in the world and he gives a complete story on money and the potential risks resulting from central bank easy money policies. Mr. Forbes does a great job of helping the reader understand what money is and why it is important. This is more relevant today than ever as global currency wars threaten many investors with true wealth destruction. He makes a strong argument to bring back the gold standard and to reduce the powers of the central bank. We agree with Steve that the Federal Reserve’s only focus should be on sound and stable money.

Sincerely,

Your THOR Team