How Housing Trends Are Shaping Lumber Markets
Housing and the North AmericanSolid Lumber Markets
By John Casey
Fall 2022
If you’ve watched the housing market over the past two years, you’ve probably had a few jaw-dropping moments. It’s no secret that a perfect storm, fueled by pandemic lockdowns and pockets flush with stimulus money, caused an exodus from urban areas to the suburbs, with renters turning into first-time home buyers seeking fresh air and more open space.
The sudden surge in demand led to immediate spikes in home prices as buyers made offers thousands of dollars over asking prices. As many homes in move-in condition were being scooped up in record time, eyes turned toward fixer-upper properties and new builds. They were projects requiring solid lumber, which was in short supply due to pandemic-related factory shutdowns. That’s when lumber prices went haywire, said John Cooney, equity analyst at ERA Forest Products Research — but everything is on its way back towards normal, or at least somewhat. “So I’ve been in this industry for about a decade. And the last two years have been something else. I work with people who have been at this 30, 40, 50 years and it truly has been an unprecedented couple of years,” said Cooney at this summer’s Georgia Forestry Association Annual Conference. “The question we get on a daily basis is: Is this the new normal or do we slide back to 2010 to 2015, when a $5 weekly increase was noteworthy news? I think the answer is somewhere in the middle.”
The sudden surge in demand led to immediate spikes in home prices as buyers made offers thousands of dollars over asking prices. As many homes in move-in condition were being scooped up in record time, eyes turned toward fixer-upper properties and new builds. They were projects requiring solid lumber, which was in short supply due to pandemic-related factory shutdowns. That’s when lumber prices went haywire, said John Cooney, equity analyst at ERA Forest Products Research — but everything is on its way back towards normal, or at least somewhat. “So I’ve been in this industry for about a decade. And the last two years have been something else. I work with people who have been at this 30, 40, 50 years and it truly has been an unprecedented couple of years,” said Cooney at this summer’s Georgia Forestry Association Annual Conference. “The question we get on a daily basis is: Is this the new normal or do we slide back to 2010 to 2015, when a $5 weekly increase was noteworthy news? I think the answer is somewhere in the middle.”
A Drop in Single-Family Home Starts
According to Cooney, there are two key drivers to North American solid lumber prices today: the repair and remodel sector and new residential construction. Repair and remodel account for over 40% of lumber and demand, making them the largest end uses, and both are remaining relatively constant. Meanwhile, new residential constructions, specifically single-family home starts, are dropping in tow with the slip in home sales as rate hikes continue. This, however, is likely to be short-lived.
“The end of Q1, it was still houses selling 10, 15, 20% over ask. Multiple bids. Two, three days on the market. How quickly things have changed since then. Affordability is the concern here. There’s all the demand in the world. You could [have built] 2 million homes last year and they all would have sold. Right now, everyone’s spooked about affordability,” said Cooney. “And it’s not necessarily that 5% rates are new. I mean, we’ve seen rates much higher than this 15, 20 years ago. It’s the speed of rate increases. I think a lot of it is the negative media coverage. You can’t avoid reading news stories on pending recession [and] state of the housing market. Things are still relatively affordable today. Demand is there. It’s sentiment, we think, that’s driven this pullback we’ve seen of late.”
Cooney believes the sentimental impact of the rate hikes will be short-lived as he anticipates rate cuts to come in the first quarter of 2023. The concern he has now lies with the back-and-forth shift in single-family starts versus multi-family starts.
“One shift that we have been keeping a close eye on — this is pretty meaningful impact for solid wood demand and consumption — is the split of multi-family and single-family starts. So on average, a single-family start will consume about three times as much OSB and lumber as a multi-family start. Early in the pandemic, you had this big shift. There were people moving from city centers out to the suburbs and exurbs, and we expected that single-family starts would take off,” said Cooney.“Over the last five years, the split between singles and multis has typically been 70% singles and 30% multis. Early in the pandemic, that shifted to maybe 72, 73% singles. And now it’s worked back the other way. Singles are back, the last three or four months, to around 67, 68%. So it’s not an eye-catching stat on its own, but when you think about what that means for lumber demand, for solid wood demand and if this trend holds for the next couple of years, you’ve got to take this along with the housing start number you’re getting and then kind of figure out what that means in solid wood demand.”
Demand for Housing Will Continue
While single-family starts are trending down, Cooney believes it to be temporary based on one statistic in particular: the U.S. has massively under built over the past decade, with between 4 and 6 million units missing from the U.S. market over the past decade.
“If you compare this with let’s say 1995 to 2005, we have not built that many homes. We got nowhere near the 2 million starts we hit in 2007 before the market collapsed,” said Cooney. “There is massive, pent-up underlying demand that has not been serviced yet and that will really help bolster us and kind of carry us through this sticky period over the next six months.”
The only thing holding back potential home builders is the affordability of these builds, with new home sales under $400k collapsing as a result of building costs. The issue is, it’s not the supplies that are driving up the costs.
“One concern I have on that front is how difficult it has become to build the entry level of affordable homes. The home builders had a big push maybe three years ago to address this millennial first-time homebuyer who wanted out of the city and out of their apartments into a single-family, two-bed, three-bed home [for] $250 to $350k. That has become nearly impossible to build. Building materials have been a factor, but the cost of permitting in some states is astronomical,” said Cooney. “So that’s something that homebuilders I think will have to address. Decline in building material costs will help, but that’s only 15 to 20% of the cost of building a home. There’s going to have to be some action on permitting costs, and if we do get a correction, I think land costs will also come down a bit in tow.”
While there are many factors contributing to the solid wood market and real estate, the greater picture suggests that there is a lot of room for the market to stabilize over coming months, and few conditions that would continue its volatility.
“It’s difficult to predict where we are going exactly, but I do believe we are certainly headed in the right direction, at least in terms of the solid lumber markets,” said Cooney. ■
John Casey is a strategic communications consultant with a primary focus on journalism, politics and public policy.
According to Cooney, there are two key drivers to North American solid lumber prices today: the repair and remodel sector and new residential construction. Repair and remodel account for over 40% of lumber and demand, making them the largest end uses, and both are remaining relatively constant. Meanwhile, new residential constructions, specifically single-family home starts, are dropping in tow with the slip in home sales as rate hikes continue. This, however, is likely to be short-lived.
“The end of Q1, it was still houses selling 10, 15, 20% over ask. Multiple bids. Two, three days on the market. How quickly things have changed since then. Affordability is the concern here. There’s all the demand in the world. You could [have built] 2 million homes last year and they all would have sold. Right now, everyone’s spooked about affordability,” said Cooney. “And it’s not necessarily that 5% rates are new. I mean, we’ve seen rates much higher than this 15, 20 years ago. It’s the speed of rate increases. I think a lot of it is the negative media coverage. You can’t avoid reading news stories on pending recession [and] state of the housing market. Things are still relatively affordable today. Demand is there. It’s sentiment, we think, that’s driven this pullback we’ve seen of late.”
Cooney believes the sentimental impact of the rate hikes will be short-lived as he anticipates rate cuts to come in the first quarter of 2023. The concern he has now lies with the back-and-forth shift in single-family starts versus multi-family starts.
“One shift that we have been keeping a close eye on — this is pretty meaningful impact for solid wood demand and consumption — is the split of multi-family and single-family starts. So on average, a single-family start will consume about three times as much OSB and lumber as a multi-family start. Early in the pandemic, you had this big shift. There were people moving from city centers out to the suburbs and exurbs, and we expected that single-family starts would take off,” said Cooney.“Over the last five years, the split between singles and multis has typically been 70% singles and 30% multis. Early in the pandemic, that shifted to maybe 72, 73% singles. And now it’s worked back the other way. Singles are back, the last three or four months, to around 67, 68%. So it’s not an eye-catching stat on its own, but when you think about what that means for lumber demand, for solid wood demand and if this trend holds for the next couple of years, you’ve got to take this along with the housing start number you’re getting and then kind of figure out what that means in solid wood demand.”
Demand for Housing Will Continue
While single-family starts are trending down, Cooney believes it to be temporary based on one statistic in particular: the U.S. has massively under built over the past decade, with between 4 and 6 million units missing from the U.S. market over the past decade.
“If you compare this with let’s say 1995 to 2005, we have not built that many homes. We got nowhere near the 2 million starts we hit in 2007 before the market collapsed,” said Cooney. “There is massive, pent-up underlying demand that has not been serviced yet and that will really help bolster us and kind of carry us through this sticky period over the next six months.”
The only thing holding back potential home builders is the affordability of these builds, with new home sales under $400k collapsing as a result of building costs. The issue is, it’s not the supplies that are driving up the costs.
“One concern I have on that front is how difficult it has become to build the entry level of affordable homes. The home builders had a big push maybe three years ago to address this millennial first-time homebuyer who wanted out of the city and out of their apartments into a single-family, two-bed, three-bed home [for] $250 to $350k. That has become nearly impossible to build. Building materials have been a factor, but the cost of permitting in some states is astronomical,” said Cooney. “So that’s something that homebuilders I think will have to address. Decline in building material costs will help, but that’s only 15 to 20% of the cost of building a home. There’s going to have to be some action on permitting costs, and if we do get a correction, I think land costs will also come down a bit in tow.”
While there are many factors contributing to the solid wood market and real estate, the greater picture suggests that there is a lot of room for the market to stabilize over coming months, and few conditions that would continue its volatility.
“It’s difficult to predict where we are going exactly, but I do believe we are certainly headed in the right direction, at least in terms of the solid lumber markets,” said Cooney. ■
John Casey is a strategic communications consultant with a primary focus on journalism, politics and public policy.
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