Investors often want to take advantage of commodity price movements in the market, particularly when activity in the property sector of the economy indicates changes are on the way. For decades, traders have used “leading economic indicators” in every market to predict price action for stocks and other commodities. The price of commodities, like lumber, used to build houses is often viewed as a leading indicator for the housing market in general.
Indeed, for the past 30 years, at least, as the price of lumber rises and falls, the housing market soon follows. Some economists think there is an inherent relationship between several commodities and the property market. Here are some of the ways that traders can use this information to profit on changes in commodity prices.
Building Permits Can Signal Commodity Prices
One of the surest ways to view the relationship between property markets and commodity prices is to study trends in the number of building permits that are issued. Permits themselves are often considered a reliable way to see what the housing market will be doing one or two years out. However, keeping an eye on building permit volume can help investors see where commodity prices are going.
There’s a standard explanation. First, when permits drop sharply there’s usually a follow-up in the property market, often expressed as a general price decline. Investors who want to confirm their suspicions can wait, after a decrease in the number of building permits, for a fall in the number of housing starts and the number of sales. When those three indicators travel in a downward, or upward direction together, the property market will usually follow in due time.
Lumber Prices Can Predict Housing Market Health
Nowhere is the relationship between commodity prices and the property market more clearly evident than in the price trend of lumber. The obvious, intimate connection between board products and houses is an important part of this economic reality. The way it plays out is almost like clockwork, in fact, and is the reason so many investors keep an eagle eye on lumber price fluctuations and trends.
When lumber prices shoot down or up, there is a high probability that the property price index, expressed in terms of housing sale prices, is ready to take a tumble. While lumber does seem to be a good commodity to predict the housing market, investors should remember that it often takes the housing index a year or two to respond to a fall or uptick in lumber price levels.
Copper and Gold Price Declines Often Foretell Property Market Woes
Another school of thought is that gold and copper are better predictors of the property markets. The reasoning has to do with complicated economic theories about the importance of gold and the integral role played by copper in the industrial sector. Proponents of this theory argue that there is a direct relationship between these two key commodities and the overall health of the property market. When gold and copper experience a decline or rise in price, the value of the house price index is expected to follow suit.