Article by Dan Shell,
Managing Editor
Sluggish is the only way to describe it: the stop-and-start nature of the ongoing economic recovery, technically since mid-2009 according to economists’ definitions of recession and recovery. Recent headlines only three days apart reflect the “good news-bad news” recovery:
“Lumber is crushing stocks, oil and even gold right now,” blared a marketwatch.com article on March 30. Noting that lumber futures had jumped 22% in March to lead all non-food commodities, the article said the “strengthening U.S. housing market” remains a key driver for demand, along with decent long-term Chinese demand and reduced Canadian output thanks to pine beetle outbreaks in British Columbia.
Yet only three days later—April 2—comes a barrons.com headline that “Investors Should Brace for Falling Lumber Prices.” Indeed, instead of seeing it as a source of strength as marketwatch.com did just three days before, the barrons.com article blamed “tepid U.S. housing construction” and a weak Canadian dollar for the impending lumber price swoon.
While citing the recent run-up in lumber futures, the barrons.com article dismissed it as the standard spring boost in prices that occurs almost every year as producers and wholesalers both seek to replenish inventories in anticipation of the April-August peak construction period. Generally good weather in much of the U.S. this year in the first quarter added to the boost in futures.
And the spring bounce is no myth: Paul Jannke of Forest Economic Advisors is quoted in the article saying lumber prices have rallied in the first quarter 18 of the past 26 years. So, lumber markets are the same as they ever were, right?
Well, no. For one thing mortgage interest rates have been below 5% for the past five years or so. In the past, such low rates have set construction activity on fire, leading to calls of higher interest rates to fight off dreaded wage inflation. But not anymore. Instead, we get housing start projections that are ratcheted up, then later walked back.
Here, almost eight years into the “recovery,” analysts are talking about reduced household formation due to a lackluster jobs market setting housing starts back; of tighter lending requirements making it harder for young workers who aren’t finding family wage jobs to save for a down payment; how student debt is holding college graduates back as they seek to pay for their educations before buying houses.
And talk about uncharted territory: There’s a growing group out there who, seeing the trillions in value sucked out of the housing market and millions of underwater mortgages, simply don’t view a house as a good investment.
Then there’s the construction industry itself: A recent report from APA—The Engineered Wood Assn. noted the difficulty builders would have in mobilizing the skilled and specialized labor required to meet annual starts of 1.5 million. The report noted that according to recent U.S. Census data, current household growth, housing replacement needs and a brightening employment picture have helped raise demand to 1.5 million units annually now, but likely won’t reach 1.5 million actual starts until the 2018-2020 time frame.
And even then if the housing start numbers are walked back a bit, remember no one wants to go back to 2009 lumber market conditions and things really are getting better—just sluggishly.