What are the challenges in the US housing market and how do they affect the wood products market?
Our experts take a deep dive into how mortgage rates are impacting housing affordability and how that impacts lumber prices
With US housing market facing unprecedented changes and challenges, we take a look at the key factors driving the US housing market and how this impacts the wood products market.
Featuring Selma Hepp, Executive, Research & Insights and Deputy Chief Economist at CoreLogic and Nikolas Scoolis, Manager, Housing Economics at Zonda, who joined us for exclusive interviews earlier this year.
What are the main challenges in the housing market today?
“There are a number of challenges in the housing market today,” said Hepp. She shares the three factors she believes are driving the lack of affordability.
- Strong lock-in effect. The record low mortgage rates over the last couple of years resulted in 95% of the households with a mortgage to have a mortgage rate that is below 5%. In addition, they would have likely bought a home when home prices were considerably lower. The combination of the two factors suggest that these households have very little incentive to sell their homes and purchase a new one.
- Low inventory. As there are less people selling their homes, it means there is a continued lack of available homes for sale. This leads to less turnover and velocity in the housing market.
- Lack of affordability. Unaffordable housing prevents many young households and those with limited incomes from being able to buy a home.
How are increasing mortgage rates changing home buyer power?
Mortgage interest rates have grown throughout this year, with the 30-year fixed rate jumping to its highest rate since 2007 in November at 7.08%, according to Freddie Mac. This has since dropped to 6.49% in December as inflation’s grip eased slightly this fall.
Higher mortgage rates have cooled housing construction and slowed lumber markets this year. Single family housing starts in the US have arrived at its lowest level in more than two years. Housing starts in October slipped 4.2% from the prior month, while permits have fallen by another 2.4%.
“Home buyer power was markedly diminished when mortgage rates increased from around 3% to almost 7%,” said Hepp. “As a result, inflation-adjusted mortgage payment on the same home is now almost 50% higher than was earlier this year.”
“Another way to illustrate the loss of purchase power for a household is to think about how much a household with $100,000 income can afford. At 4%, that household can afford a home priced at about $466,000 dollars, but at 7%, they can only afford a home priced at about $385,000. That’s almost a 20% decline in purchase power for that household.”
What are the main challenges in the housing supply chain?
In addition to affordability, complications brought by supply chain challenges have also contributed to builders’ headaches.
“The biggest challenges for the housing supply chain have been the three Ls: land, labor and lumber,” said Scoolis. However, instead of the logistic challenges faced in the early days of the pandemic with lumber supplies, the nature of the delays has changed.
“The current market conditions suggest the blockers are now moving into delays in the final touch products, such as HVAC and windows,” he said. “Supply chain side delays are pushing delivery dates for houses even further out, from 3-6 months to 6-10 months. This both costs builders more money and results in longer waits for buyers to get their homes.”
What does this mean for the lumber and wood products market?
Economic headwinds caused by the combination of rising interest rates, the highest inflation in 40 years and stock market tumbles have given traders little reason for optimism.
As housing starts drop off to align with cratering home sales, field consumption of wood products has begun to drop rapidly. Sensing the slowdown and the accumulation of inventory upstream, buyers across framing lumber and structural panel markets have largely relied on just-in-time buying, waiting until on-hand inventories dwindle before ordering highly specified tallies that require prompt shipment. For many, those two requirements have been more important than price given the risks of holding rapidly depreciating inventory as the market continues to weaken.
With wood buyers taking a more conservative approach managing inventory and final demand for lumber and structural panels continuing to cool, Fastmarkets believes the unprecedented volatility that has characterized the wood products market since early 2020 is set to subside. Prices will likely see a wider range than pre-Covid levels, but with demand falling into 2023 and supply continuing to increase, this will keep a lid on upside surprises in the market.
Where do we see the housing market heading in 2023 and beyond?
When it comes to the future of the housing market, both Hepp and Scoolis expressed concerns over the challenges brought by affordability.
“The housing market is likely to see some challenging times ahead, especially in the form of high mortgage rates which are expected to level up higher than many forecasts did,” said Hepp. “As a result, the number of home sales in the next two years will likely decline from its 2021 Peak to 2015-2016 levels. Home price deceleration will continue to pull price growth closer to long run average. Nationally, however, we are unlikely to see notable declines in prices on an annual basis, but real prices in 2023 may fall.”
“The problem we are running into is an affordability crisis that could be described as historic,” Scoolis. “In 2023, mortgage rates will stay elevated above 6%, maybe even pushing higher into 7%. We will see the market pull back as the numbers do not reflect optimistically in the long term. While the fundamentals support demand, the challenge will be to navigate these short-term changes first.”
Looking on the brighter side, Hepp suggested that the challenging market conditions could bring more innovation in construction and housing finance, which may open up more opportunities for better affordability in the future.
“The fundamentals of the housing markets are solid and support demand,” added Scoolis. “When you look at the demographics, the Millennials are the largest living generation, Gen X and Baby Boomers are retiring and maybe looking to move to where their kids are having kids, while Gen Z is gearing up to move into the market.”
Want to learn more about the wood products market? Access the Random Lengths Weekly Report to receive the latest prices, analysis, and market coverage of more than 1,600 items of softwood lumber, panels, and other wood products in North America. Speak to our team today to see how we can help you.