Lumber has been a top-performing asset, as housing demand and wildfires have increased demand and reduced supply. But a drop may be next.
2020 has been a crazy year for investors—but those who invested in the slow-and-steady world of lumber have seen some of the best returns in decades. This oft-overlooked asset has become a top performer thanks to wildfires raging the West Coast, as well as the surprising strength of the housing market.
During the spring lockdowns, lumber processing facilities shut down, disrupting supplies. While most have reopened, many facilities in the Western United States are now contending with fire. Weyerhaeuser, the largest producer, just reported that fires have directly affected its operations in Oregon.
On the supply side, lumber is most prominently used for the housing market. Thanks to a strong rebound in housing sales and prices—or, rather, a trend that never was impacted by lockdowns—demand for lumber remains robust. That includes the construction of new homes, as well as at-home projects for existing homes.
The net impact has been soaring lumber prices, up 50% so far this year, and likely higher once the wildfire season’s impact can be fully calculated. Lumber prices are overall up about 68% than their trend for the past five years. That’s resulted in an increased price of over $16,000 for a new home.
Lumber stocks, meanwhile, were one of the first sectors to fully recover from the market crash in March and have since far outperformed the S&P 500.
Investors typically flock to lumber as it’s considered a non-correlating asset with a long-term view. That means it tends to do its own thing no matter what the stock market is doing.
As trees naturally grow 2-8 percent annually by volume, it’s a great long-term investment, with high asset returns and a low standard deviation relative to other assets.
How is this possible? With sound management. If lumber prices are weak, trees can be left to grow, increasing their final value down the line.
The current trend has the opposite occurring now. Higher prices mean cultivating younger trees—if they aren’t ruined by fires—making for yet another area with a tight supply chain.
Rising material costs may push prices up too much too quickly, souring the housing market before the rest of the economy can fully recover.
But some relief may be in sight. As autumn approaches, construction tends to slow down in most of the country, which could give some time for prices to cool off. In other words, today’s buyers of lumber, lumber stocks, and homes may be able to get a slight bargain in the months ahead as sentiment cools.
Last modified: September 23, 2020 2:31 PM