We often expect housing and lumber and timber markets to interact and behave in certain ways. However, these expectations assume operable levels of market clearing information and pricing that apply (somewhat) uniformly across North America in seamless, frictionless transactions. You know, like in the real world.
Regardless, frameworks and assumptions still support understanding and decision-making, and recent discussions with clients probed the rough-hewn relationship between housing, lumber and timber. One firm’s cost becomes another firm’s revenue. Buyers need sellers. Investors need opportunities.
Let’s revisit three factors (and fundamental drivers) as we screen distractions from trade negotiations, demographic second-guessing and data uncertainty while assessing forest industry investments and timber markets:
- Demand for housing. Forisk’s current US Housing Starts Outlook peaks at 1.56 million in several years, before returning to a longer-term trend. However, when you dig into the required housing replacement rates (Harvard’s Joint Center for Housing Studies) and US household formation rates (and not accounting for anything close to “normal” immigration), a 1.5 million baseline pencils out below what the US needs to satisfy fundamental demand on a decade-to-decade basis. Mid to longer-term, the housing story remains robust, even accounting for brief delays in home-buying by millennials choosing to wait a few extra years to have children or pay down student loans.
- Cost (and supply) of housing. Recent housing data, with average home size increasing again, implies less interest in starter homes and potential stagnation in the total market. However, a more direct culprit is the rising costs associated with home construction across a range of variables: high building material prices, especially for lumber (further escalated by US trade policy toward Canadian lumber); high transportation costs for these materials (due, in part, to driver shortages); and high labor costs (due, in part, to labor shortages exacerbated by uncertain and hard-to-navigate visa programs and immigration policies in a low unemployment environment). The result clarifies our current high-priced, short-supply of available homes for potential buyers, but does not imply long-term structural changes in demand for homes.
- Softwood lumber production by region. This story has been written: the US South will lead North America for the foreseeable future. Relative timber supplies and pricing and the flow of capital investment in mills across the continent nail this down with high confidence (and some humility; see note below). For timber and lumber investors with long timeframes, this reality addresses “where do we prioritize investment?” in any story that relies on future US housing markets.
- Note (that may only interest me): according to Merriam-Webster, “foreseeable” can mean “lying within the range for which forecasts are possible.” This definition troubles me. We have learned, over the years, that any forecast is both possible and wrong.
In conducting market analysis and developing investment strategies, we want to understand what matters, where we actually have influence, and then focus there. Trees grow and markets cycle. And clear, well-executed plans that account for the physical facts on the ground and local market capacities get us closer to our investment and business goals.
Forisk will discuss business strategies and investment frameworks during “Timber Market Analysis”on June 19thin Atlanta, a one-day course that details how to track, analyze and rank timber markets and wood baskets. For more information, click here.