The economic benefits of a healthy and robust housing market are well known. The construction of new homes has ripple effects that are felt throughout the entire economy: manufacturing benefits from materials purchased to build the home, construction benefits, of course, from the labor required to erect the structure, and household balance sheets generally improve from any appreciation that follows a decent market. For the forest products industry, housing is of particular importance. More than any other market, housing and the construction of new homes mirrors the demand for wood products of all sorts. Spruce and fir lumber is used for framing, oriented strand board is used for sheeting, high-grade hardwood is used for flooring, and veneer is used for indoor furnishings. It follows that housing is watched closely by those who work and live in the woods, but, despite national data showing ever-improving and ever-strengthening conditions, a closer look at the data reveals less-than-stellar conditions.
The number the forest industry is primarily concerned with is housing starts, or the number of houses currently being built. Since the lows of the recession, these starts have steadily increased, though they stay stubbornly below the pre-bubble average of around 1,400,000 units.
This number can be further broken up into two significant subcategories: 1-unit structures and five-or-more-unit structures.
One-unit structures refer to structures that are intended to house one family:
Federal Reserve Economic Data
Five-or-more-unit structures are intended to house many families, such as apartment complexes.
Federal Reserve Economic Data
Oddly, the starts for five-or-more-unit unit structures have far surpassed pre-‘08 heights, reaching a new peak of 510,000 units. One-unit structures, while still growing steadily, remain more anemic. For wood markets, a boom in multifamily structures is not optimal. These buildings tend to use less wood because they are often constructed from steel and concrete, and if they are made of wood, it is less wood used per family. The increase in multi-unit housing suggests a trend of more people choosing to rent instead of owning a home, and that is exactly what is happening.
There are several theories to explain this sudden rise in renting and multi-unit structures, but most can be traced back to millennials—they simply aren’t buying houses. It is attributed to tougher lending standards, student debt loads, as student debt sits at $1.3 trillion and increases, and a changing economy, as job growth is disproportionately concentrated in urban areas. All three of these explanations do well to shed light on the trends, but they undersell baby boomers as a key demographic. Boomers are not downsizing at the rate expected, often dissuaded by the high cost of smaller homes and apartments. By not listing their homes, it creates a feedback loop whereby high prices are not kept in check by increasing supply.
Baby boomers want small, affordable homes, and millennials want small, affordable homes. Unfortunately, these are exactly the type of homes that are not being built. The price of developable lots did not correct to the same extent as houses in the wake of the financial crisis, and it has led to a shortage of land and a subsequent unprofitability of small-home construction. This is especially true in urban areas. The houses being built today are larger and more expensive, and so the median price for a newly built home is up more than 8% from last year. It is a strong imbalance, and it is one that stands as a road block to future market performance.
The Geography of The Markets
While looking at starts is useful, it only tells you about the national picture, which obfuscates key trends. To take it a step further, I threw together these maps of building permits using data from the Census and the National Association of Home Builders:
Looking at the normalized and nominal distribution of building permits, we can see two general trends: strength in the south and in the west. In the west, much of the growth has followed the shale boom, though not to the extent I had anticipated. To compare the normalized housing construction with shale plays, I recommend this map of geological deposits and this map of income growth since 2000. The exposure of these housing markets to the collapse of crude oil is uncertain. Texas, which shows both phenomenal growth in housing and concerning exposure to oil, enjoys other benefits like low taxes and a low cost of living that may continue to draw people to the state. In Idaho and Utah, states largely on the outskirts of the shale boom, demographics are young, and birth rates are high, which are likely engines for housing construction. The strength in the South is all about economic growth and changing demographics. The region hosts younger families as well as attracting retirees and other migrants from the north.
More concerning for the local forest industry, which sells most of its wood in the region, is the notable weakness in the northeast: In both maps, the northeastern corner of the country is scarred with lighter colors. Surprisingly, Maine, for all the talk of its economic hardships, shows vigor on a normalized basis, beating most other states in the region. Because of the above-average density of urban areas in the northeast, it’s likely it suffers from aforementioned obstacles. It may be for precisely this reason that Maine is faring well: Maine is a much more rural state, and therefore may be more resilient against the land supply problems that plague more urban areas. This would also explain why New Hampshire and Vermont show similar strength, though to a lesser extent. Maine’s case, however, should not be over stated–we are still well below pre-bubble averages, but more in line with national trends.
Federal Reserve Economic Data
Is a Recession Looming?
In all regions and categories, the general trend is upwards, but as those who follow the markets are aware, the word on the street is recession. Global growth is slowing, corporate profits are shrinking, inventories are rising, trade is slowing, and US manufacturing is already contracting. All of these indicators historically point to a temporary contraction of the US economy. But none of it should come as a surprise. Since 1785, the average duration between recessions has been three years. The longest the US has gone without having one was between 1991 and 2001, albeit with a “soft landing” in 1994. We are approaching seven years since the end of the last recession, so, if history is any guide, there is a high probability of a recession within the next two years.
That fact in itself is no reason to panic. The financial crisis of 2008 has skewed our view a bit as to what recessions are. They do not necessitate an implosion of the financial world and cause untold havoc on the world economy. Most of the time, they are healthy, short-lived corrections that can help purge unproductive debt and fix imbalances, making the economy more productive in the long-run. That said, risks to the global economy are substantial, and the spike in the credit default swaps of European banks, namely Deutsche Bank, which has recently had to defend its liquidity, is ominous.
If the US does enter into economic contraction, housing starts will almost certainly decrease. The only time this has not been true was during the 2001 downturn, which carried with it a unique set of circumstances that we should hope are not repeated. What happens beyond that is anyone’s guess. Certain trends, like the growth of student debt and the growth of cities, will prove to be long-term, while an aging population reluctant to downsize will prove to be more temporary. For better or for worse, these markets tend to shun stasis, and what that means for the forest products industry—only time will tell.