U.S. Housing Market Faces Potential Headwinds

Since the unprecedented crash of 2008, U.S. markets have struggled to make up lost ground. After five years, the economy has finally started to pick up steam – slowly, but surely. And as the economy continues to pick up its pace, many investors are returning to the corner of the market that was one of the primary sources of the 2008 financial crisis: housing. Across the board, housing stats have been on the rise in recent years, including home prices, housing starts, building permits, and construction. A closer look at the industry in recent months, however, reveals several red flags [for more commodity news and analysis subscribe to our free newsletter].

Land Prices Could Hinder Recovering Housing Market

In 2012, investors saw new home sales skyrocket, while residential construction spending also increased relatively quickly. Housing starts, however, have declined slightly in recent months; falling from roughly 43 thousand units in April to 35 thousand in August:

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According to analysts, the recent slowdown in new home building goes hand-in-hand with the sudden increase in land prices, as land typically accounts for up to 40% of building costs. Lot prices began gaining traction in late 2011, fueled by increased demands for new homes and a shortage of lots across the country. Nationally, land prices rose roughly 7% in Q1 of 2013. But by the second and third quarter, prices gained approximately 6% and 4%, respectively [see Caterpillar's Earnings Highlight Mining Industry's Challenges].

As homebuyers began to balk at the unsustainable rise in new home prices, demand quickly retreated during the summer months of 2013. As a result, construction companies have started reevaluating how much they are willing to pay for land. Land prices, consequently, have lost some momentum over the past two quarters, but according to Larry Seay, CFO of Meritage Homes Corp. “It is good for the industry to take a little breather, let the land market moderate and get to a more normal rate of growth and house-price appreciation.”

What To WatchTimber

Though the recent pullback in new home sales and land prices may not signal a turning point in the housing market, investors should keep a close eye on these metrics. In addition, there are several commodities and commodity producers that may be impacted by these headwinds [see Q&A With Peter Schiff: Silver Looking Golden].

A typical 2,400 square foot, single-family home requires approximately 16,000 board feet of framing lumber and over 14,000 square feet of other wood products including plywood, particleboard and fiberboard, making timber is one of the most essential commodities used in the homebuilding industry.

Copper is also an essential component to both residential and commercial buildings, as this commodity is used in a variety of ways, including copper wiring, plumbing, fittings, and valves. Some of the most prominent copper producers and manufacturers include: Southern Copper (SCCO), Encore Wire (WIRE), Taseko Mines (TGB), and Freeport-McMoRan Copper & Gold (FCX).

For those wanting to fine-tune their focus on building and construction companies, State Street’s SPDR Homebuilders ETF (XHB) is a great option.

Investors should note that while the recent setback in land prices and new home sales have caused some concern for housing analysts, the overall trend has been a positive one.

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Disclosure: No positions at time of writing

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