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Get ready for another lumber rally,

Despite its epic fall since March, lumber could be about to surge once again, experts say.

The price for random length lumber futures took an epic dive this year falling to around $509 per thousand board feet recently, down by almost two thirds from more than $1,460 in March, according to data collated by TradingEconomics.

The reasons for the dip were multifaceted. First the extremely high price level was the result of then COVID-19 pandemic and subsequent related problems of getting the required labor to run the saw mills. That resulted in a shortage and sent lumber prices sky high.

Then move on to this year and the Federal Reserve began its war on inflation, whihc meant high borrowing costs for potential home buyers. Traders anticipated the Fed’s moves to raise interest rates and figured demand for wood, a key cost in new home building, would drop. It did and prices fell in advance of what looks like a near-complete halt to the U.S. housing market. I wrote about the bleak outlook for lumber late last year.

Housing starts dropped to an annual rate of 1.4 million in July, down from 1.8 million in April. They have subsequently bounced back a little.

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What the smart money now anticipates is a housing recovery late next year.

“Lumber prices lead economic activity in housing a year in advance,” writes Shawn Hackett, president of Hackett Advisors in a recent report. “We are optimistic that the US economy will be improving by late 2023 which means that lumber prices should be placing an important low now.”

Put another way, traders are bullish on lumber because they see a healthier economy in around a year’s time. That would likely coincide with lower inflation and hence lower interest rates. Both should help home buyers and home builders such as those tracked by the SPDR S&P Homebuilders (XHB
XHB
) exchange-traded fund.

That’s just part of it. There’s another tailwind as well. Russia and its ally Belarus together account for 12.2% of the global exports of sawn timber, commonly dubbed lumber.

The ongoing war in Ukraine, and the tightening sanctions against Russia and its friends, will likely mean reduced supply of wood globally. In turn, the likely increased U.S. housing demand next year combined with lower supply should mean higher lumber prices.

Of course, there are risks to playing a rebound. The Federal Reserve, which has been raising interest rates fast and will likely continue to do so, may overshoot. In other words, it could raise rates higher than is necessary to tame the inflation villain. If that happens, and the Fed doesn’t have a great record of policy timing, then the economy maybe in weaker shape than many forecast.

Still the odds look good for an upswing of some sort over the coming months.

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