View from Crystal Bay: The Housing Shortage is Here

Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.

When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.

Last week’s continuing trends:

  • Lumber
  • Silver 
  • Gold
  • Nasdaq Index
  • Cotton

Last week’s reversing trends:

  • Coca
  • Euro-Pound Cross
  • Orange Juice 
  • Gasoil
  • Japanese Yen

What we are taking note of: 

Lumber continued to soar. I addressed the sudden shortage of lumber in a note two weeks ago, but I think it’s worth it to look a little deeper into the lumber market.

Most US lumber is used for housing; about one half gets used in new housing starts, and most of the rest goes into repair and remodeling of existing houses. Therefore, the health of the US housing market is crucial for lumber sales.

US housing starts have not yet recovered from the catastrophic collapse after the financial crisis of 2008. For several decades, housing starts averaged about 1.5 million per year, sometimes undershooting (during recessions) and sometimes overshooting (during booms). The housing boom of the mid-2000s saw housing starts exceeding 2m per year for a while. They dropped afterward to a historically unprecedented level of 500k per year (the lowest level since the data started in 1959), and it took seven years for housing starts to reach 1.2m per year, where they stayed until very recently. 

As a result, housing starts have lagged population growth and household formation for a decade. We have fully absorbed the housing overhang of the 2000s, and we are now facing housing shortages.

What made the situation more acute now is the massive impact of coronavirus pandemic and political unrest on cities. We are seeing an exodus from urban areas and from the coasts to rural areas or exurbs, especially in the South (Florida/Texas) and the mountain states. However, there is not enough housing inventory available to absorb the new demand. The existing housing inventory is in the wrong places. We will need to build millions of new houses to accommodate everyone who wants to move.

How are we heading into next week? 

The stage is set for a historical building boom that could rival or exceed the mid-2000s era. Unlike those days, it wouldn’t be driven by speculative investment but rather by fundamental shortages. It could last longer and prove to be a more reliable investment theme.

The Crystal Bay Ubitrend has a long position in lumber and continues to hold.