Can Lumber Indicate a Bottom in Real Estate?

On March 19, 2007 I wrote an article about how you will know when real estate will recover. However, I wanted to share something else with you on what to observe when a possible bottom is coming in real estate. Watch the lumber commodity prices. Actually, you can even get an impression with the home improvement stores like Lowes and Home Depot for a possible recovery. Every quarter companies will provide updates on their quarterly earnings and a going forward look in the economy. Distributors of lumber will start indicating improvement in this area. Here are some reasons why lumber could be a good indicator to watch.

In 2004, lumber commodity prices hit an all time high in the market at around $460 a contract price which was also the peaking cycle for housing. Let's face it. You need lumber to build a house, right? In 2005, the signs were showing that these prices were beginning to come down. This also correlated to a topping in housing in 2005 when Toll brothers, one of the largest builders in the nation, missed their third quarter earnings and were the first to announce that there was a slow down showing up in housing. From there, the rest is history and is still history in the making. So,where are we now?

As of Friday, November 23rd, a lumber commodity contract closed at $254.60. However, it has been as low of $230 in October which is 50% off its all time high of around $460. Ok, now I'm going to get a little geeky with you talking about technical analysis but it is one way you can understand what is going on internally. Traders look at Fibonacci retracements from a high point to a low point or vice versa to find bottoms and tops. In technical terms, when you have a bubble like we have witnessed in a market, you typically can get at least a 50% correction which is what we have presently as a result of the housing bust.

However, when you have a weak trend like we do now you can easily get a 61.8% retracement from the high which would put us at a price of $175.72. That would be another $54.20 off the low in October. The question right now is do we break the October low and go to that next Fibonacci level? Or could it stop here and move up. Some traders are watching this for a possible bottom in lumber. However, there are traders that will use a 78.6% retracement in a weak trend which would then put lumber to $98.44. That would be a huge drop from today's price of $254.60.

Now, you may assume that all this technical talk is too confusing to understand. However, I guarantee that if you pay attention to areas that are the building blocks of real estate, you will be ahead of the game to know when to buy and when to sell your real estate. There is not going to be a bell ringing to let you know when the real estate market has bottomed, you have to think outside the box. Moreover, that is what traders do. However, I know you're not a trader, but you can observe these slow areas by reading information on what is going on in the stock market to determine when real estate will have bottomed. By the time the media picks up a recovery with housing sale numbers, traders will already know we have bottomed. They will see not only lumber prices improving but all other areas that play a part in the housing market, including a banking recovery.

There are a lot of resources on the Internet that will give you information about lumber prices and what home improvement companies say on their quarterly earning reports about improvements with lumber sales. However, keep in mind that one quarter doesn't make a new trend but you do pay attention to it. I believe once we do bottom, we might see some consolidation for a while in the area of lumber before anyone can get excited about real estate. Consolidation means we remain in a price trading range. However, the longer we consolidate the stronger the bottom should be. Once you hear that lumber is no longer in a deflationary mode and demand is back, along with improvements in earnings from builders and home improvement stores, this will give you one good sign we have bottomed in real estate. And hopefully the fat lady will be able to start clearing her voice at least.