Why Are Lumber Prices Plummeting? Look At The Regional Banks
Housing In Trouble
While everybody is focused on tech earnings this week and the charts of Microsoft, Amazon, Alphabet and Facebook, I’m paying attention to this chart.
While lumber has had its share of ups and downs, even over just the past six months, the bottom has been falling out. In some ways, it shouldn’t be surprising since it’s followed this pattern twice already just since February, most recently in late March following the failures of Silicon Valley Bank and Signature Bank. Today, we’re seeing this trend again as the data continues to deteriorate and First Republic Bank looks like it might fail as well. From a technical standpoint, the chartists would tell you that the pattern of lower highs and lower lows is especially bearish.
But I’m not into technicals. I’m about conditions. And the conditions backing lumber, particularly the housing market, are not positive.
One of the big factors in the current decline in lumber prices is probably First Republic Bank. I don’t say that just because that’s the same thing that happened in March, but it does raise concerns that 1) the liquidity pressures within the regional banking sector may not be over yet and 2) regional banks account for a significant portion of the lending market.
Depositors have taken a lot of money out of the smaller community banks in the last month. To offset that, they most likely need to either slow down lending in order to even out the balance sheet or they need to sell off assets, such as bonds that are sitting on losses. Neither one is ideal, but it makes it likely that regional banks won’t be offering up credit the way they were in the past. This is a significant development because, even if they aren’t the lender of first choice in the real estate market, they play a big enough role to have a major impact.
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