Lumber’s Going Higher….And Homebuilders?

"Walter Fielding - It doesn’t make any sense, why would somebody be selling a million dollar house for a hundred thousand? Jack - Who knows? A divorce, loan sharks, a scandal. The point is you get to capitalize on another human being’s misfortune. That’s the basis of real estate. So, do we have a deal?"

-The Money Pit, 1986

Lumber is cheap right now….relatively speaking anyway. After peaking at over $400 in March of 2013, prices have been in a steady decline. They hit a four year low of around $215 in late September, and after a mini rebound in October, they are headed down once again.

Beyond the global supply and demand picture, we revved up our predictive analytics engine to look at trading patterns in lumber, across varying lengths, to find times historically where lumber has traded in a similar fashion. We then looked at the largest home builders, factoring in their current trading patterns with that of Lumber, to find times where both the stock and lumber prices traded in a similar fashion and to see what typically happens next.

Per the table below, we analyzed the current pattern in Lumber prices looking back in the medium and longer term. As you can see, Lumber is up the majority of time in the next forward period regardless of the length of the look back window.

Next, we took the 6 month pattern in Lumber, and did the multi-factor analysis looking at the trading patterns for each stock along with Lumber to see if there are times historically when both traded in a similar fashion. How do the stocks typically react in these environments?

We didn’t find any similar historical instances for Pulte or Lennar, but did find interesting results for the other Big Three: DR Horton (DHI), NVR Inc. (NVR) and KB Home (KBH).

All three stocks see average returns in the next 3 months of double digits with KBH typically rising the most.

Projection for DHI based on 4 historical matches

Projection for NVR based on 7 matches historically

Projection for KBH based on 2 historical matches

Have a great week!