What does the future look like for the North American housing market?
Access the replay and read five key takeaways from our recent webinar ‘Housing at a crossroads: Why near-term pain could be short lived’
The North American wood products industry is currently facing a recession, due to the volatility in housing. In order to fight elevated inflation and interest rates, it now finds itself in ‘correction mode’.
Fastmarkets’ webinar ‘Housing at a crossroads: Why near-term pain could be short lived’ features an experienced panel of industry insiders who reflect on the new challenges and potential solutions to the tumultuous US housing market.
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Our expert panel consisted of Fastmarkets’ economists, Jennifer Coskren and Dustin Jalbert, plus guest speakers: Hamilton Fout (Fannie Mae), Sean Tighe (Lumbermans Merchandising Corporation) and Pedro Loureiro (Nomad Framing).
Below, we shine a spotlight on five of the key takeaways.
1. Multi-family housing remains resilient
Despite the market showing volatility with volume and pricing, plus a slowdown in North American demand, there are some bright spots. Many buyers in the industry are pivoting to the affordable housing sector and looking to multi-family units.
Sean Tighe (Senior Vice President of Purchasing, LMC) says, “We could point to single-family homes and say they are slowing down, but then you look at multifamily construction or repair and remodeling and they are staying afloat. Multi-family building construction is still seeing a good pipeline and there hasn’t been a significant slowdown.”
It was expressed that multi-family housing is responding “in a big way right now” when it comes to market recovery and could be the short-term way toward housing affordability.
The affordable multi-family sector will see an increase because there’s still a significant shortage of the housing units in the United States.
There are some signs, however, that the multi-family segment could “slow down” in the near term, due to challenges around banking constraints. Pedro Loureiro said that “smaller developers are starting to pull back on projects as banks are requesting 50% deposits before they will offer a loan, whereas the loans used to be 70-80%.”
2. US housing supply is not catching up to demand
There is still an ongoing discrepancy between housing supply and demand. Hamilton Fout (Vice President of Economic and Strategic Research, Fannie Mae) referred to the “1.2 million households per year,” which are estimated to be formed in 2023 and 2024, but this falls short of the “2 million units” that would be required to meet demand. The gap is forecast to be an ongoing issue, which is not likely to resolve itself in the near future.
Fastmarkets’ economist, Jennifer Coskren, Said the existing inventory was “way below a million units and that’s 30% below where we were before the pandemic.” The lack of supply is only going to contribute to the affordability issue of new housing.
One consequence of the demand/supply problem is, according to Jennifer, the rise of larger developments.
“37% of buildings under construction were larger buildings with 20 or more units in 1999,” she said, “…but in 2021 and 2022 it was 85% of construction starts.” The share of larger buildings has literally doubled. Larger developments are coming up more frequently and in the past 5 years it has seen large growth.
A 400-unit project is typical nowadays.
3. Inventories are light, while partnerships are valued
Given that the wood products industry is in the midst of a recession, inventories are quite light – at least on the retail level. It’s also a way to hedge against further weakness or uncertainty in case wood product prices face further downside risk as demand continues to cool.
Sean Tighe said “We have already slipped back into a ‘just in time’ market as things are still tenuous and can change on a dime.”
In terms of current permanent structural changes, he highlights the way buyers view the supply side, “We have seen a lot more dedication to particular suppliers, where people will want to align with their partners as they seek a payoff based on the strong relationships.” In the current climate, it is apparent that those who seek strongly aligned working relationships are benefiting more than those who take more of a “shotgun approach to the market”.
4. Mass timber could be a future solution
Mass timber, formed by joining together layers of wood to create large structural elements for construction, is a building material that has been gaining traction over the last decade. This mode of construction has grown in popularity across North America and is regarded as an environmentally friendly substitute for other materials.
Pedro Loureiro remarked that the US is seeing a “significant increase” in its use and this could be a game-changer for the housing market. Previous regulatory hurdles are seemingly fading, which is facilitating growth. He cites an example, “New Jersey, for example, just adopted a new code a few weeks ago that now allows us to build up to 18 stories with mass timber”.
He believes that this will be replicated across the country. A potential challenge, however, could be the lack of manufacturing in the US. Currently, a large proportion of the material is coming from Europe.
5. Repair and remodeling are underrated market factors
The puzzle of what is happening with underlying repair and remodeling activity has stumped many in the industry since the outset of the pandemic in 2020 and made it difficult to understand market developments in the wood products industry.
Fastmarkets estimates that in 2022 R&R activity in the US accounted for 27% of domestic structural panel demand, 33% of domestic nonstructural panel demand and 41% of domestic lumber demand. For those in the industry who are aware of this, one source of frustration can be the lack of timely, reliable data on R&R activity.
In the webinar, Fastmarkets economist, Dustin Jalbert highlighted repair and remodeling as an “under-discussed” issue mainly because there’s a lack of data at a very high frequency. Fastmarkets will be launching its new repair and remodeling index this month with the release of our short-term forecasts, along with reporting of the new index in Random Lengths.
As per the chart above, the index offers a seasonally adjusted view. Here, the purple line reveals a large spike in remodeling activity at the outset of the pandemic. It also reveals that some spikes occurred when the rounds of stimulus checks came out. However, since the spring of 2021, activity has continued to cool as households return to the service economy and elevated building material prices cooled projected demand in 2021 and 2022.
Free access to the full webinar replay
Our Fastmarkets R&R Index has now launched. Subscribers to the Lumber Commentary, the Structural Panel Commentary and the Particleboard and MDF Commentary will be given full access to the time series with our normal publication schedule, but the index will be reported in Random Lengths Weekly with more truncated historical data for broader consumption. Speak to our team to find out more about the index or for a demo.