Despite rapid decline, the housing market could be bottoming out

On a recent DAT Freight & Analytics iQ show, Dustin Jalbert from Fastmarkets discussed the 2023 economic outlook for the lumber and housing construction industry. Here’s part of the interview with Ken Adamo, Chief of Analytics, and Dean Croke, Principal Market Analyst.

Dean Croke: Flatbed and dry van carriers have benefited substantially from the housing market boom in the last two years; what does 2023 have in store?

Dustin Jalbert: Single-family starts were around 1.32 million at the peak in December 2020, but since then, they have dipped to the 800 to 900,000 per month range. Seasonally adjusted, we’re talking about a 25 to 30% drop in 12 months.

The volume of activity is a considerable dip in a short period. The good news on the housing side, particularly the single-family market, is that things are bottoming out because interest rates are starting to turn around. We had a considerable rate spike in mortgage rates last year; home builders are also trying to do their best to cut prices and make those mortgages much more affordable for prospective homebuyers. 

And we are starting to see this trend in preliminary high-frequency data, including purchase applications. Anecdotal evidence from realtors is that the market is beginning to pick up again. We are starting to find a bottom in home sales, which is good news for construction activity. Our forecast for total housing starts is about 1.3 to 1.4 million units in 2023, which is down 12 to 13%, and single families will probably be down by about 16 to 17%, somewhere between 800 and 900,000 units. So pretty significant drop, but in the near term, there are some signs of a bottom here.

Ken Adamo: On our side of the fence, we see a lag with some of those indicators you’ve mentioned, which points to a little more of a pessimistic outlook into late Q2 and Q3. What are you seeing?

DJ: The one thing that has buoyed the construction market is that even though starts have fallen off a cliff in the past couple of months, there’s still a historic number of homes under construction. Much of that is multifamily, in which fewer building materials go into a multifamily unit than a single-family home. 

But the good news is, in a weird way, all the supply chain disruptions and labor shortages we’ve seen over the last few years have stretched out the cycle times for construction activity. So that single-family homes take six to seven months to build instead of eight nine to ten months. 

So we’ve got this vast amount of accumulated volume under construction but yet to be completed. And that is primarily the back end of the building cycle, not for lumber and structural panels like OSB (oriented strand board) and plywood where we’ve seen demand come from, but more so in appliances, windows, doors, or cabinets. By the year’s second half, we expect that builders will have a lot of unfinished inventory they want to clear before they start picking up on construction activity. 

KA: We’re hearing reports that many people are backing out even after making initial deposits or an initial draw on a construction loan. And what are your thoughts on that? 

DJ: Unfortunately, there are only a few publicly available data on cancellation rates. If you look at some big publicly traded builders, they report their cancellation rates, and in some cases, they went from five to ten percent to 30 to 50% five cancel rates in a couple of months. So that has happened, and the good news is it has bottomed out in November or December. 

DC: One of the trends we observed during the pandemic was the extensive repairs and renovations that existing homeowners undertook. Do you know how much that has been driving overall demand for lumber, and is that expected to continue?

DJ: It’s a huge category, and it’s under-discussed. When we talk about wood products, about 30 to 40% of demand is consumed in the repair remodeling (R&R) space. And it’s actually for lumber or softwood lumber specifically; repair and remodeling is a more extensive and used category than new home construction, which usually blows people’s minds. 

When you look at what happened during the pandemic, people were stuck at home with stimulus money. What followed was what we called the do-it-yourself (DIY) boom, where homeowners were putting in fences, outdoor decks, and other smaller to mid-sized projects that didn’t necessarily need a contractor. The DIY boom boosted demand for repairing and remodeling renovation at the outset of the pandemic, but that has cooled in the last 12 months, dragging overall direction. It’s bottoming out because all the small to medium-sized projects are finding a level again.

DC: Do you have a sense of where the majority of lumber comes from? 

DJ: The most significant single-producing region is the U.S. South, where a lot of Southern Yellow Pine is used for lumber production. It’s the fastest-growing region due to very low sawlog fiber costs. That’s the highest input cost to make lumber. There’s a lot of capacity investment in the South, which accounts for about 25 to 30% of the total volume within North America. There’s a lot of production in the Pacific Northwest, but growth is more restricted due to timber availability. Canada supplies a lot of lumber to the U.S. market and accounts for about 25 to 30% of total lumber consumption. A lot of that volume from Canada typically moves via rail, whereas the U.S. is much more of a flatbed truck market. British Columbia is a large lumber producer, as are Ontario and Quebec. Growth in Canada is also constrained in terms of its ability to ramp up production of the multi-decade beetle problem. 

We’re also getting some incremental growth from Europe and South America regions, less for framing-grade lumber and more for molding and millwork-type material. 

The full interview can be found here.

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