Sometimes the oddest correlations make the best forward-looking indicators. This is certainly the case with lumber and the housing market. Here’s what this odd but accurate indicator ‘sees’ ahead for U.S. real estate.
Several times in the past we’ve looked at the correlation between lumber and housing – related ETF: iShares US Real Estate ETF (NYSEArca: IYR).
It’s an off the wall kind of an indicator, but it’s proven more accurate than any other housing indicator.
To get the correlation right, we need to set lumber futures forward by about 14 months.
The chart below does just that, as it plots lumber against the PHLX Housing Sector Index.
As the gray oval on the right shows, lumber saw a big pop and drop in 2012/2013.
The two gray ovals to the left illustrate that the magnitude of such sizeable pops and drops tends to appear muted in the housing sector, nevertheless it suggested an eventual slowing of the housing market.
Lumber is currently at an interesting juncture, as lumber prices were unable to break above resistance and just fell to test support.
As of right now, lumber suggests that the housing market is not ‘out of the woods’. The housing blues may start all over if support for lumber fails.
This would not only affect multi-billion dollar ETFs like the Vanguard REIT ETF (NYSEArca: VNQ), or SPDR Dow Jones REIT ETF (NYSEArca: RWR), but also millions of Americans.
A proprietary analysis of supply and demand for the SDPR S&P Homebuilders ETF (NYSEArca: XHB) also shows that demand for homebuilding stocks is deteriorating.