With record low-interest rates and a wave of fiscal stimulus in play the lack of new home inventory could spark a surge in new home construction. At the same time, timberland investments become a lot more interesting with lumber prices rebounding strongly and the housing market expected to hold up well the next few years as a greater number of millennials start to make more money and purchase homes. Housing’s expected resilience is also due to the market already being pretty severely undersupplied. And the recent pandemic leads us to an even further decline in inventories as builders in many areas paused, new homeowners, hesitated, and baby boomers delayed plans to sell. 

The benefit that many see in timberland investment is its tendency to hold up during troubled times, much like land prices. Wood prices also tend to keep up with inflation over time, and demand for wood products naturally increases over time as the population grows. Over the long-term, timberland returns have done well compared to other major assets and they aren’t closely tied to fluctuations in the stock market, making them popular as an alternative investment.   

Lumber prices cratered along with nearly everything else in April but have seen a strong and steady climb since the beginning of May. Some of that is due to surging demand by consumers, who have presumably decided to tackle a backlog of DIY projects while stuck at home. Obviously, home improvement projects aren’t enough to sustain the industry and will likely fall off as businesses reopen.

Around half the demand for lumber comes from the housing industry so all things timber are extremely sensitive to the health of the housing market. When the COVID-19 pandemic hit the U.S., housing starts dropped by -20% to -30% in many areas. At the same time, housing prices have actually accelerated in many regions due to the sharp inventory decline as many buyers pulled listings during lockdowns. 

The economy will be the ultimate determinant of how the housing market shakes out and there are still a lot of unknowns. In a fairly quick rebound scenario, there is a lot of optimism that rising home prices brought on by severe inventory constraints will lead to a swift rebound in homebuilding. I’m thinking that could be what happens… home building could pick-up momentum.  

For those looking to put some money into homebuilders or timberland without buying the actual land, below are few vehicles to consider. As always, be sure to consult your adviser before making any investment. (Sources: LBM Journal, AgriInvestor, Motley Fool, Invesco)

Weyerhaeuser (Stock Symbol: WY): Weyerhouser is hands down the industry leader in terms of market cap, roughly three times the size of all the other timber REITs combined. Weyerhaeuser is also the largest private owner of timberlands in the U.S. While timberlands is Weyerhouser’s largest segment, it also operates a wood products segment, and a real estate, energy, and natural resources segment.

Rayonier (Stock Symbol:RYN): Rayonier is the second-largest timber REIT, but it’s a distant second. By land size, Rayonier is less than one-fourth the size of Weyerhaeuser. The other big difference between Rayonier and Weyerhaeuser is manufacturing – Rayonier is a pure-play timber REIT.

PotlatchDeltic (Stock Symbol:PCH): The third-largest timber REIT, PotlatchDeltic is about two-thirds the size of Rayonier in terms of both market capitalization and volume of land it owns. PotlatchDeltic also has a large manufacturing business and is one of the Top 10 lumber producers in the U.S.

CatchMark Timber Trust (Stock Symbol: CTT): The smallest timber REIT, CatchMark owns about 1.6 million acres, although the majority of those acres are owned in joint ventures. About half its revenue comes from its timber business, while the rest is roughly split between its real estate operation and its investment management segment.

iShares S&P Global Timber & Forestry Index ETF (Stock Symbol: WOOD) which tracks the S&P Global Timber & Forestry Index. The top holdings for this ETF are Rayonier, PotlatchDeltic, Weyerhaeuser, West Fraser Timber. 

Invesco MSCI Global Timber ETF (Stock Symbol: CUT) 
based on the MSCI ACWI IMI Timber Select Capped Index. The top holdings for this ETF are Packaging Corp of  America, Amcro, Avery Dennison, International Paper, WestRock, Weyerhaeuser. 

S&P Homebuilders ETF (Stock Symbol: XHB): 
The top holdings for this ETF include Home Depot, Lowes, D.R. Horton, Masco, Lennar, NVR, Williams-Sonoma, Whirlpool, Johnson Controls, Lennox.  

Individual Home Builder Stocks: 
Toll Brothers (TOL), Lennar (LEN), Pulte (PHM), NVR (NVR), D.R. Horton (DHI).

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