Lumber Market Comes Alive
Solid Building Activity Across the Country Awakens a Slumbering Market
It was a matter of time before the lumber market responded to an uptick in the nation’s housing activity. The market has finally shown some strength the past six weeks after months of grinding downward. Only time will tell whether this will be a sustained rally or a spurt, associated with altered timing of traditional spring inventory replenishment brought on by extreme winter and spring weather patterns. A combination of sluggish first-quarter housing activity and a record level of lumber imports served to keep buyers off the market and a surplus of materials in the pipeline. Now, robust building activity seems to have absorbed much of the wood in the pipeline resulting in solid mill order files. This increase in demand fueled near double-digit increases in Contract Lumber’s Commodity Lumber Price Index from mid-May through mid-June and trading has held firm the past two weeks with the industry in Holiday Mode.
U.S. softwood imports from overseas suppliers hit a 6-year high in the first quarter, up 63% over the same period last year. Couple that with plunging North American wood exports so far this year, plus stifled U.S. demand, and the result was a surplus of lumber sitting at the mills, reloads, distribution facilities and lumberyards. That combination kept significant downward pressure on an over supplied market. One reason for the influx of softwood imports is the strength of the U.S. dollar against other currencies. Not only does a high exchange rate encourage imports but it discourages U.S. exports, which plunged by 33% in the first quarter. European imports to America were up 72%. Another contributing factor to the weight of U.S. lumber supply in late 2014 and early 2015 was the drop off in demand from China. Normally, China takes 20% of American lumber exports but that number plummeted by 55% in the first quarter and is widely to blame for leaving the U.S. oversupplied.
But now, at least for the near-term, it appears that the oversupply status has been corrected with a surge in demand. Analysts are confident that the pick-up in domestic construction and the possibility of a rebounding Chinese’s housing market will keep demand rolling. Wall Street Journal reporter, Tatyana Shumsky wrote in her recent article, “Lumber Set to Build on Its Rally”, that the current rebound in lumber prices is just the beginning of a sustained higher level of pricing for lumber commodities. Whether this holds true, only time will tell, but recent U.S. housing starts and permits data will likely spur the rally forward as we enter prime building season. April housing starts jumped over 20% to a 7-1/2 year high and even though initial reports on starts for May softened, building permits for last month surged to the highest level in eight years with multifamily permits leading the way, hitting their highest level in 25-years and representing nearly 50% of overall permits. Builder confidence is high and sales traffic in builder’s models is reported as brisk. The market was slow getting started this year but seems poised for a solid second half.
Housing affordability has crept back into the consciousness of the market as home prices are growing four-times the pace of wage increases. At some point, most likely sooner rather than later, this escalation of home prices will start to impact buyers and bankers decisions. Largely missing from the housing recovery numbers are first-time homebuyers. For millennials, people born from the early 1980’s to the late 1990’s, housing affordability may be more complex than the larger debt-to-income ratios many assume are keeping them from qualifying for new home financing. The sheer number of starter homes available on the market today, may be another hindrance. Smaller, more moderately priced homes, own significantly less share of the total single-family home market now than in past years. Entry level homes, characterized as under 1,800 square foot, have sold at half their normal pace the last two years. There is debate regarding how much of this weak starter-home sales reflects weak demand, and how much reflects supply issues. Many production builders claim that it just doesn’t make good business sense (cents) for them because they just can’t make high enough profit margins producing moderately-priced, smaller homes. Regardless of why, it would be hard to envision a full recovery for housing without a significant rebound in entry level sales.
Of course, the poor entry level housing demand has catapulted the multi-family market to new heights. Apartment projects are springing up everywhere and with vacancy rates at less than 8%, and rents skyrocketing, there is no reason to think multi-family will experience any significant downturn in the next couple of years. One observation about lumber consumption and multi-residential construction - it requires about 30% less lumber per unit on average to construct apartments than it does a single family home. That may be impacting the supply/demand balance on the supply-side regarding lumber consumption verses traditional usage when a stronger single-family housing market dominated starts. Mills are ramping up production to meet the demands of a million-plus housing start market but consumption is just not aligning with those expectations.
With all the positive housing news out there, you’d think we’d be looking at a strong bull lumber market and maybe in a few weeks, we will. However, there is considerable caution being exhibited right now with traders and buyers trying to figure out which way this market is going to move. This kind of uncertainty tends to lead to increased emotion and when emotion gets ahead of true supply/demand dynamics, crazy things can happen – and do. My thinking is pretty simple. If you have current needs and existing lumber prices work within your budget, secure the material. Rolling the dice to gain a few potential points of margin could prove to be very risky – then again, my appetite for risk is relatively conservative. I would just be in fear of a budget-buster lumber market run with so much of the housing and economic news being positive