This post includes excerpts from the Q1 2015 Forisk Research Quarterly (FRQ).

U.S. builders and homeowners use a lot of structural panels – oriented strand board (OSB) and plywood – to build and remodel homes. Timberland investors and managers care about this because manufacturing structural panels requires tens of millions of tons of wood raw materials annually in the forms of ply logs (large sawtimber), pulpwood, and chips. Over the past 18 months, we conducted a multi-phased study for projecting U.S. structural panel consumption over the next ten years and for tracking key drivers of wood products use over time. This post “takes a look under the hood” of this research and shares key findings.

First, we developed econometric models with variables such as housing starts, GDP, population and others to better understand the relationship of these products to the broader U.S. economy. Outputs from all approaches – regardless the approach, variables, and form – correlated highly with each other. Simpler models performed better (a note for nerdy folks like us: our final model had an R-squared of 0.97).

Second, we evaluated the results of this final model relative to history and in light of research by organizations such as the USDA Forest Service and APA-The Engineered Wood Association. Basically, we always want to confirm that “the model” makes sense in the real world given how we actually build houses and manufacture products today. We concluded that our model “over forecasted” consumption based on the volume of structural panels required for given levels of housing starts and industrial activity.

Third, we asked, “to what extent did the inputs and assumptions flowing into the model reflect our understanding and expectations for the future?” The inputs into the model came from the years 1990-2014. We noted that, from 1990 through 2013, single-family starts comprised 78.5% of annual U.S. housing starts on average. This assumption is critical because, based on data and research provided by APA, single-family homes require 200% (3x) more structural panel volumes than do multi-family units. So we evaluated approaches for modifying our model and estimates to better reflect the world we live it.

For example, we estimated a “housing mix” adjustment and applied it to the results of the statistical model. Specifically, we estimated a share of “overbuilt” homes in our model with respect to structural panel use. Long story short, our original model “overbuilt” about 11% of future homes in our Base Case housing starts outlook. Per APA, the average single-family home in 2014 required 13,810 square feet of structural panels, while the average multi-family unit required 4,500 square feet. This implies 9,310 square feet (13,810 – 4,500) per “overbuilt” home.

On average, the “housing mix” adjustment reduced the Forisk Base Case projections by 1.6 billion square feet of structural panels annually. A final assessment found the results closer to historic relationships and in-line with current and projected industry productive capacity. At the end of the day, national and regional projections get matched to local markets and mill capacity on the ground.

 

To learn more about the Forisk Research Quarterly (FRQ), click here or contact Brooks Mendell at bmendell@forisk.com, 770.725.8447.