Will Rising Lumber Prices Translate to Homebuilder Strength?

Lumber prices are rising, which could push housing prices higher and strengthen the Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL).

As the global economy continues to re-open, the demand for housing continues to remain elevated. However, low supply has been pushing prices higher, and now, the cost of materials like lumber is rising as well.

“Lumber prices have spiked this year,” a Construction Dive article said. “Lumber futures contracts for May delivery hit $1,645 per 1,000 board feet, up from about 60% a month ago, and 374% over the last year, reports Wells Fargo. It’s the fastest rise since the post-World War II housing boom, according to Mark Vitner, managing director and senior economist at Wells Fargo.”

“The demand for lumber is exceptionally high and the supply is constrained,” said Vitner.

NAIL seeks daily investment results of 300% of the daily performance of the Dow Jones U.S. Select Home Construction Index. The fund invests at least 80% of its net assets in financial instruments, such as swap agreements, securities of the index, and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index measures U.S. companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers, and suppliers of building materials, furnishings, and fixtures. The fund is up over 70% in 2021.

NAIL Chart

Lumber Prices Rise with Construction Boom

Rising lumber prices could help traders stave off inflationary pressures using NAIL as a hedge. Whether the low supply hampers or helps homebuilders remains to be seen.

“Booming house and apartment construction are one economic signature of the pandemic, but lumber’s price surge is causing homebuilders and contractors a market-wide case of agita,” an Engineering News-Record article noted. “Sasson’s development company performs its own construction and he declined to say how much unexpected lumber increases have added to the cost of his long-planned rental project.”

“To explain what’s happening with wood, economists and market analysts cite imbalance of supply and demand, production cuts at sawmills when prices were lower, trouble ramping up production and shipping woes due to COVID-19,” the article added.

For more news and information, visit the Leveraged & Inverse Channel.