One way to get ahead of housing data might be to look at the direction of lumber prices.
Pragmatic Capitalist points out that lumber prices have been highly correlated with housing starts over the last few years. By such logic, they argue that a 20% drop in lumber prices since June has signaled housing weakness.
It makes sense that housing starts could drive lumber prices. New houses certainly feed into the demand side of lumber’s price equation. Conceivably, lumber prices could also react quicker than data collectors to higher or lower housing starts.
Yet there’s at least one major problem.
Lumber prices aren’t just a reflection of demand for wood alone. They are also a reflection of the current supply situation as well. Changes to lumber supply could cause prices to rise or fall despite demand remaining unchanged for example. This would invert the correlation with housing starts and ruin this indicator.
While watching lumber prices makes sense, you probably want to keep a close eye of how supply changes could be jamming the signal before rushing to any conclusions. If this proves untenable, then so is the indicator.
(Charts via Pragmatic Capitalist)
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