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It is becoming increasingly difficult to square the sharp drop in lumber prices with the ongoing surge in U.S. home-builder stocks. U.S. housing sector fundamentals remain encouraging but the odds of disappointment appear to be rising along with U.S. mortgage rates.

The S&P Home-builder index has rocketed higher, climbing almost 150 per cent since November 2010. But if the future's so bright, how do we explain Scotia Capital analyst Benoît Laprade's recent downward revision in his lumber price forecast in light of "unexpected weakness"?

Mr. Laprade remains bullish on forestry stocks along with virtually every other analyst in the sector. Yet, commodity prices have returned to levels (see chart) from where the rally began, just before Hurricane Sandy.

It seems likely that home-builder stocks are ahead of themselves and indeed, the recent price performance of the subindex suggests looks suspiciously like the trend is rolling over. Even if new home sales across America are improving, their prices remain a shadow of 2006 levels.

The lumber price's round trip is definitely telling us something – the U.S. real estate industry is recovering but the process is slow and it is highly unlikely that a new housing boom is on the horizon. Investors should remain cautious on home-builder stocks.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .

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