By: Keith Balter, Senior Economist, Forest Capital Partners, LLC
Over the past year, timberland owners in the Inland West have seen sawtimber prices retreat as lumber producers sharply curtailed production at mills across the region. In recent weeks solid wood products prices finally responded to the reduced production, and have picked themselves off of the floor and regained some forward momentum. After sinking to near historic lows at the beginning of the year, softwood lumber and plywood have posted a string of price increases, pushing the RL composite lumber price index in the first half of May to an average of $274/MBF, up 12% from the low-point of 240 in March. Another hopeful indicator was the recently reported 8% jump in housing starts in April.
Have we turned a corner and are we standing at the beginning of a sustainable recovery in wood products markets, or are we experiencing a false spring? Unfortunately, the demand/supply fundamentals point to the latter. On the demand side of the equation, the outlook for new residential construction, the key determinant of lumber and structural panel demand remains disheartening, despite the overall up-tick in April. All of the April gain occurred in the highly volatile multi-family category, where the construction tends more toward concrete and steel rather than wood. Starts for single family units actually edged a bit lower to 692,000 units on a seasonally adjusted annual rate, which is down 58% from the heady markets in April 2005.
A significant rebound in housing in the remainder of 2008 is not likely to occur for a number of reasons. Access to mortgages for first-time and marginally qualified buyers has been severely restricted in the wake of the sub-prime mortgage crisis. Lenders have increased their requirements for home buyers regarding income and credit ratings, and have increased vigilance in verifying financial information and assessing property values. With home prices falling, potential buyers are also pulling back from the market, concerned that they could buy the same house for less in the near future. At the same time as the pool of buyers has become more limited, a rising tide of foreclosures has been keeping the inventory of unsold homes at high levels. In April, the inventory of unsold homes was close to 10 months, based on the current sales rate, while the number of home foreclosures keeps moving higher. First American CoreLogic, a research firm, estimated that forclosed properties represented nearly 0.5 million of all the homes on the market this past January.
Time will be needed to work off the excess housing inventory already in the system and bring markets back to balance. This process could be speeded along with the assistance of the federal government. The foreclosure issue has assumed headline status in the presidential race, and Congress is frantically working to deliver a housing assistance program prior to the Fall election season. The House recently passed a major housing bill that would provide assistance to homeowners whose home values are less than their mortgage obligation. The program would provide $300 billion in federal loan guarantees in exchange for lenders agreeing to reduce the outstanding balance on troubled mortgages. The House also passed a separate bill that would provide $15 billion to states to set up programs to buy, refurbish and then sell or rent foreclosed homes. Although, President Bush has vowed to veto both pieces of legislation as they are currently written, the delivery of some package of federal assistance to housing markets remains very likely in this presidential election year.
In addition, to the continuing weakness in new residential construction, wood product markets in 2008 will also feel the affects of a slowdown in the general economy. Growth in the U.S. economy slipped to an inflation adjusted annual rate of just 0.6% in the last quarter of 2007 and in the preliminary estimate for the first quarter of this year. This is down from 2.9% in 2006 and an average of 3.1% in the first three quarters of 2007. The other principal markets for softwood lumber and structural wood panels are repairs and alterations, industrial uses and non-residential construction. All of these market segments had remained relatively healthy over the past couple of years when new home construction slipped lower, but they have become much more vulnerable in the current economic slowdown.
Given the still formidable problems that need to be resolved in the housing markets and the drag on wood products demand that will result from the current sluggish economic environment, the recent bounce in lumber and wood panel prices is likely be short-lived. With the deep-pool of underutilized lumber and panel capacity in North America, any spike in prices will trigger a burst of production that will quickly flood the market and bring prices back to the ground. Timberland owners will have to wait until at least next year, before the foundation of a sustained recovery in wood products and sawtimber prices will begin to be established.