Market Snapshot April 14, 2021



Good Morning on this terrific Wednesday,


Bonds are under some slight pressure this morning. At the moment it appears to be an expected pullback. The news this morning was not bond friendly but none of it is considered to be high impact. Later today the Fed will release their beige book as well as a lot of Fed Speak (including Chairman Powell); this is typically non eventful for the markets but it is something to be aware of, just in case there are any surprises. For now, floating looks ok although if we leak much (especially into the afternoon), probably worth locking.


There is a great piece from Bloomberg today which encapsulates housing, demand, growth, supply chain problems all in one… it is worth the few minutes to read. It applies broadly to the economy and is not limited to housing.


The housing market is going wild in the U.S. Prices are soaring all around the country, and the frenzy to buy is so intense that half of the homes on the market are selling within a week, according to Redfin. The obvious answer, it would seem, is to build more homes. However one problem is there’s a shortage of lumber, and prices for that are soaring as well.


Here’s a chart of lumber futures:


04142021 Lumber


The solution to this constraint is to build even more homes. That may sound counter-intuitive, but when you look at what’s going on in the market, it’s the clear way forward.


There was a great WSJ article back in February which pointed out that while lumber itself was scarce and expensive, actual timber is cheap and abundant. There’s plenty of trees out there for the chopping. The problem is, there’s a shortage of sawmill capacity to turn those trees into usable wood. The 2007 housing crash was one driver of a collapse in the number of sawmills.


What’s more, the sawmills themselves aren’t operating at full capacity. As Bloomberg’s Marcy Nicholson reported yesterday, sawmills and lumber yards are facing widespread labor shortages, further impeding their ability to supply the market. One thing that’s clear in the reporting is that the sawmills and lumber yards have (understandably) underestimated the strength and durability of the boom over the last year. They didn’t see the renovation boom exploding like it did last summer, when so many people were stuck at home. And they didn’t expect the housing market to stay on fire like it has through the winter, a period that’s typically slow. And so you get this situation where diminished expectations of future demand manifests itself in present tense shortages.


The obvious thing to do is to change those future expectations. Make plans to build a lot more houses for years to come. Keep the demand boom going. That gets the suppliers to build out capacity. You might think that this is only kind of a long-term solution that would do nothing for the acute situation, but that’s not obviously right. The easiest way to ramp up sawmill capacity right now would be to solve the labor shortage. And you’ll solve the labor shortage with substantially higher wages. Employers will be more comfortable offering big wage increases if they think conditions will stay robust for a long time. There was a great Peter Coy piece a couple of weeks ago about companies of all stripes trying to solve the labor shortage with one-time signing bonuses for new workers. That strategy makes sense if you think the economy is only experiencing a temporary stimulus-fueled sugar high that will revert to slow growth. Companies are understandably reluctant to offer big, permanent wage increases if they think that conditions will “normalize” next year or soon thereafter. So they try the signing bonus route.


To solve the lumber shortage, we need a sustained boom in homebuilding. In the long term, that will encourage more investment in sawmill capacity. And in the short term, that will enable higher wages to get more out of the capacity that already exists. There’s an acute shortage of homes right now, but the problem has existed for years. Starter homes have been particularly scarce. Now’s a great time to go big and break through all of these unfortunate constraints.


Stay healthy and make today great!