The U.S. housing market is the hottest it's been since before the Great Recession. Few expected skyrocketing demand for new home construction, which is why lumber prices are soaring through the roof.
Instead of concerning yourself with the futures markets, it could be better to invest in top-tier lumber stocks. Here's a quick primer on the lumber market, as well as the best lumber stock to buy right now.
Image source: Getty Images.
A boom unlike any other
It's not just rapidly surging housing prices that are raising eyebrows. It's the ways in which this real estate market differs from the hot markets of previous cycles. Traditionally flourishing major metro areas like Manhattan are seeing demand decline. Meanwhile, interest is booming across a motley mosaic of emerging housing markets in rural communities and smaller cities. According to The Wall Street Journal, America's hottest housing market is Coeur d'Alene, Idaho. Folks are packing up their laptops and flocking to cities like Spokane, Washington, and Billings, Montana. Many companies are now offering their full-time employees "work from anywhere" as a permanent option. With this as a real choice, a large and growing number of people are in a new situation: Their job doesn't have to dictate where they live.
The result is an ongoing exodus from big job markets like nothing we've ever seen before. But even if there are fewer constraints now on where people live, there still are some serious limits in terms of housing -- and a big factor that's keeping homes scarce and pricey is lumber.
Why lumber prices are at record highs
On May 3, lumber futures prices reached $1,575 per thousand board feet, a record high and a more than four-fold increase from year-end 2018 prices. It's a classic example of low supply paired with high demand. U.S. housing starts are at their highest level since the Great Recession as Americans rush to buy bigger and newer homes.
U.S. Housing Starts data by YCharts
American homes are built using softwoods like spruce, fir, and pine that are largely harvested in the Northwest and Canada. For years, Canadian pine beetle infestations ravaged many of these forests. In an effort to make use of their timber before the insects could render it worthless, logging was increased, which put downward pressure on lumber prices. After opening the tap on its supply for years, Canada is now tightening restrictions on logging in an effort to preserve its forests. These softwood trees can take 30 years to grow to a harvestable size. Given that big lead time, the Canadian timber supply will likely be challenged for quite some time.
Sawmill operators who suffered during the housing crisis of 2008 have been slow to increase inventories. The conservative nature of those businesses means less capacity to turn timber into lumber, which has resulted in a large spread between timber prices and lumber prices. This disparity is yet another reason why supply is low and lumber prices are soaring.
As bad as the lumber supply situation is, the demand side is really what's causing the shortage. Not only are housing starts up, but average sale prices of both existing and new homes are at record highs as consumers scramble to take advantage of low mortgage interest rates.
U.S. Existing Home Average Sales Price data by YCharts
Weyerhaeuser's business model
Based in Seattle and founded in 1900, Weyerhaeuser (WY -1.59%) owns over 11 million acres of U.S. timberlands and leases additional Canadian acreage under long-term licenses -- making it one of the world's largest holders of timberland. The company is classified as a real estate investment trust, though that's a bit misleading considering most of its revenue comes from selling logs and making wood products.
Weyerhaeuser directly supports the U.S. housing market by harvesting and replanting trees, and turning logs into lumber at its sawmills. It also produces engineered lumber, orientated strand board plywood, and medium-density fiberboard panels. The company posted record-high revenue in the first quarter, as well as its highest quarterly net income in more than five years.
WY Revenue (Quarterly) data by YCharts
Equally impressive is the Q2 outlook it delivered along with its last earnings report. Management is forecasting that its timberlands adjusted EBITDA will be comparable to Q1's result, but anticipates "significantly higher" adjusted EBITDA from its wood products segment (which contributed 80% of its Q1 adjusted EBITDA). On the first-quarter conference call, CFO Nancy Loewe said that "new residential construction activity has remained at very favorable levels and our builder and dealer customers are anticipating a strong second quarter following the already strong first quarter."
As one of the biggest and most established players in the space, Weyerhaesaer's strong performance and outlook make it a natural fit to benefit from surging lumber prices.
