This is the first in a series related to Forisk’s Q4 2017 forest industry analysis and timber price forecasts for the United States and Canada.
Fear has no place in evaluating a forecast. What are we scared of? That the forecast will be wrong? Do not worry; forecasts are wrong the moment they get published. Markets change, operators adapt and assumptions curl up in the corner with their blankets. The question is not one of accuracy. Rather, we ask, “How will this local timber market perform relative to others if housing does this or housing does that?” In this way, we apply forward-looking scenarios to our understanding of the “facts on the ground.” We test how local timber markets and wood baskets perform, relative to each other, given different economic scenarios. This requires a baseline perspective on housing markets.
Forisk’s Housing Starts Outlook combines independent forecasts from professionals in the housing industry. Currently, these include Fannie Mae, Freddie Mac, the National Association of Home Builders (NAHB), PNC, and Wells Fargo. Forisk applies long-term assumptions from the U.S. Energy Information Administration (EIA) and Harvard’s Joint Center for Housing Studies to establish the peak and trend over the next ten years (Figure).
Overall, Forisk projects 2017 housing starts of 1.21 million, up 2.9% from 2016 actuals, as compared to our estimate of 1.24 million earlier in the year. Forisk’s 2017 Base Case peaks at 1.53 million housing starts in 2023 and 2024 before returning to a long-term trend approaching 1.50 million. For comparison, our January 2017 Base Case last quarter peaked at 1.54 million housing starts in 2023. The independent housing forecasts captured in Forisk’s Housing Starts Outlook reflect a range of expectations for 2017 that have merged since January. For example, Fannie Mae reduced its 2017 forecast from 1.31 million to 1.20 million, while Wells Fargo elevated its forecast from 1.22 million in Q1 to 1.26 million starts in Q2 and Q3 before bringing it back to 1.22 this month for 2017.
In addition to the Base Case, Forisk applies a “Slow” Case scenario in the FRQ models to test the implications of less growth and lower levels of housing starts on forest industry production and timber prices. The Slow Case assumes annual housing starts change at 50% of the Base Case. This results in 1.19 million starts for 2017. Overall, the Slow Case projects, on average over the next ten years, 10% fewer starts than the Base Case.
Forisk analyst Andrew Copley supported the research for this post. To learn more about the Forisk Research Quarterly (FRQ), click here or call Forisk at 770.725.8447.