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A steep downdraft in lumber prices in recent days has spooked equity investors who are bullish on market-leading U.S. housing stocks. The sustainability of a recovery in the U.S. housing market is far more questionable than it was a week ago.
Stronger housing starts and home price data have pushed the S&P Homebuilder Index higher by 40.6 per cent since August 2012. The commodity price for lumber has climbed alongside it as demand increased.
The dilemma for investors has been the important distinction between the temporary effects of Hurricane Sandy and signs of a new bull market in U.S. housing. The weakness in lumber markets this week suggests that the fourth quarter jump in demand was more of a short-term, post-hurricane rebuilding phenomenon than many expected. Housing stocks reacted negatively, declining more than seven per cent. (see chart).
The bullish and bearish contingents on the future of the U.S. housing market appear evenly matched as reflected by the best source of analysis on the sector, Bill McBride's Calculated Risk (Mr. McBride remains bullish, by the way). With the future uncertain, investors should pay close attention to lumber commodity prices to gauge the next move in this economically all-important sector.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.