If you want to know what's going on in the economy, you need to watch the price of lumber...
Housing is the most important asset class in America. When house prices fall, banks fail, consumers cut back, unemployment rises, and the economy collapses. But when house prices are strong, the economy rebounds.
In other words, the U.S. real estate market is the main pivot in the whole economic mess we're in right now. If you can figure out what's happening in real estate, you can figure out everything else.
Lumber and building materials are the best leading indicators of real estate.
Take the timeline of the current crisis as an example. The lumber price reacted before any other market: Lumber prices peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. Home Price Index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.
When the recovery comes, I expect it'll show up first in building materials, too.
So what's happening right now in the building materials markets?
Ro-Mac is a $100 million lumberyard near Orlando, Florida. Ro-Mac supplies central Florida's homebuilders and contractors with building materials like 2x4s, rebar concrete, and gypsum wallboards.
I received an e-mail from Ro-Mac's general manager, Don Magruder, last week. Don says several suppliers announced price hikes in December and he expects "a caravan" of further price increases in January.
"My feeling is that the month of December is the calm before the price storm of 2010," he writes. Don advises contractors and builders to be "wary" of entering long-term contracts.
He says supply is the reason prices are going to rise. Manufacturers of building materials have closed plants, fired workers, and sold their inventories. Many have gone out of business altogether. Don calls it "supply destruction." He says the moment demand picks up, there's going to be an instant shortage of materials.
My wife and I are taking advantage of the situation by doing extensive renovations to our home. We don't need new kitchen cabinets, but my wife and I have found such a good deal, we're thinking about having our entire kitchen remodeled. We're also considering a new roof and an upgrade for our air conditioning system. Last month, we had our yard landscaped front and back.
It's hard to say exactly how much we're saving. But given the low price of labor and materials, I bet we're getting at least a 30% discount.
If you're looking to get some work done on your house, now's a great time. But the easiest way to take advantage of this situation is to buy stock in forest-products companies like Weyerhaeuser (NYSE: WY, Stock Forum) and Rayonier (NYSE: RYN, Stock Forum). They benefit when building material prices rise.