Another year is behind us, with no shortage of discussion topics when reflecting on the US residential construction and wood products markets in 2023. In many ways, the year played out how our team expected as we laid out in last year’s “Predictions” piece.
Here is how our predictions played out throughout 2023:
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But things have played out in unexpected ways as well. For one, the single-family market rebounded more rapidly than anticipated in the second half of the year. The US labor market also remained far more resilient to the Fed’s salvo of rate hikes and the winddown of fiscal stimulus than most forecasts – including our team – were calling for.
By popular demand, we’ve decided to follow up on last year’s “Predictions” piece with another for 2024. As we frequently remind our readers, the future is uncertain and market conditions can change rapidly. Nevertheless, here are Fastmarkets’ key calls for the 2024 housing and lumber market.
When analyzing housing market activity, it is very easy to become hyper-focused on the interest rate environment as the primary driver. Look no further than last year to see how sensitive the housing market is – both single-family and multifamily – to large swings in interest rates. Following what will go down as one of the fastest rate-tightening cycles on record, the Federal Reserve essentially slammed the brakes on home sales and financing new construction within a very short period of time.
However, lost in this intense focus on interest rates is the fact that an essential prerequisite for shelter demand growth is a strong labor market: new home purchases or rental formations will not happen if people are losing their jobs en masse. A steady income stream is necessary for households to be able to make a discretionary purchase – or frankly, qualify for a loan – like buying a home, even in an accommodative interest rate environment. For this reason, we think a key question for the 2024 housing market will be what happens in the labor market.
Despite some signs that the overall economy could be in for a mild spending slowdown as savings buffers shrink and access to credit tightens, most of the evidence points to resilience in the labor market. For example, nonfarm payroll growth stabilized around 200,000 jobs for most of 2023. While by no means a blistering pace, job gains remain healthy enough to drive solid income growth and keep the current business cycle expanding. More importantly, even as job growth has predictably slowed, the unemployment rate has remained below 4%, barely budging off its recent historically tight cycle lows. This suggests that even as the pace of hiring normalizes, layoffs continue to be very low in the current economic environment as businesses remain optimistic about their future. Other similar labor market indicators, like weekly unemployment claims and job openings, also suggest a similar phenomenon. The labor market, while experiencing some benign cooling, continues to be strong despite the bearish sentiment that is reflected in media reports.
More bearish followers of the US economy will push back that labor market data is a lagging indicator of the economy and other more leading indicators are flashing warning signals. Auto and consumer credit delinquencies are on the rise, which at some point could crimp aggregate spending. Household savings rates, although leveling off, are at historically low levels, suggesting consumers have been burning through savings built up during the pandemic to cope with very high inflation over the last two years. Student loan payments have finally restarted as well, which is impacting discretionary spending for millions of households.
All these concerns are valid and part of the reason Fastmarkets believes a further cooldown in the economy is in order for 2024. Our call is for real gross domestic product (GDP) to expand by 1.8%, slightly below the 2% trend we typically think of as the US’s potential trend output. But even with all these headwinds, is a labor market recession upon us? The hard economic data (i.e., retail sales, industrial production, jobs) seems to suggest no. Take, for example, high-frequency indicators of the economy like the New York Fed’s Weekly Economic Index, which is a composite index of about a dozen weekly indicators scaled to track year-over-year real GDP growth, which show no signs of the economy hitting an alarming stall point. The Atlanta Fed’s GDPNow, a “nowcast” of the current quarter’s GDP as key monthly indicators are reported, also shows healthy growth trending in the 2.0-2.5% range in the fourth quarter of 2023.
It is easy to keep sounding the alarm on the economy, but until we see more meaningful deterioration in the hard data, the odds of a major economic slowdown in 2024 remain low in our view. Also, keep in mind that falling inflation provides the Federal Reserve the flexibility to cut rates to address the “full employment” side of its dual mandate if/when we see signs of a potential economic slowdown. With 500 basis points of potential rate cuts in its back pocket to respond to economic stress, this provides the Federal Reserve with a tremendous amount of firepower to spur demand in rate-sensitive sectors like housing construction, as well as to alleviate the credit stress we are seeing bubble up in some pockets of the economy.
Follow the data, not anecdotes.
One of the key features of the market last year was residential construction correcting hard in response to the historic rise in interest rates from 2022 into 2023. Higher mortgage rates crushed affordability for many prospective homebuyers and made construction financing extremely challenging for small builders and multifamily developers alike. However, home builders aggressively rolled out incentives, particularly interest rate buydowns, to augment affordability and help clear excess inventory that had accumulated by early 2023. By the spring of 2023, new home sales had begun to rebound in response to the wave of incentives and smaller floorplans, and single-family permits and starts quickly followed suit.
Right now, Fastmarket’s call for US housing starts in 2024 is for production to be up slightly from 1.41 million units to 1.42 million units. This is somewhat of an out-of-consensus call at the moment as many other forecasts are assuming a broader economic recession, which would pull down both single- and multifamily starts for the year. While we are on board with multifamily construction seeing deep cuts in 2024 (down 60,000 units to 407,000 units), we believe the strength in the single-family market we saw last year will continue into 2024. A combination of factors, including 1) falling interest rates as core inflation approaches the Fed’s target, 2) sustained resilience in the labor market, 3) continued use of incentives by home builders to entice prospective buyers and 4) structural underbuilding as a fallout of the global financial crisis, will all be key factors that keep single-family sales and starts growing into 2024.
We anticipate single-family starts will total 1.00 million units, though we believe there is upside risk here if the resale market remains tighter than we anticipate and/or if rates fall more rapidly than our current call.
The repair and remodeling (R&R) market remains one of the most crucial categories for wood products demand, yet often remains under-discussed. Fastmarkets estimates that R&R accounts for over 40% of softwood lumber demand in the US, higher than any other major end-use market, including new residential construction. To track volumes in this category, we created our own proprietary R&R indicator, the Fastmarkets Repair & Remodeling Index (RRI), to create a timely gauge of R&R volumes in the US.
Our tracking of the R&R market over the last year indicates a market that is still in correction mode. Most of the industry is aware by now of the tremendous volume of home improvement activity that took place in the early stages of the pandemic due to unprecedented fiscal stimulus to households, a wave of cash-out refinances in response to extremely low mortgage rates, and surging home equity and the temporary pivot of service spending to goods. However, since the summer of 2021, the volume of R&R activity has corrected downward closer to its pre-pandemic trend levels – though we should note we are still above 2019 levels of activity.
It is worth noting that despite the correction in the aggregate RRI index, a number of crosscurrents are influencing this category, namely the divergent trends in do-it-yourself (DIY) activity versus larger, professional (“pro”) renovations. The former has seen a major correction in activity off-peak 2021 levels, likely reflecting workers returning to the office and traveling more and thus having less time to take on projects. Many smaller projects were also axed as building material prices for items like dimensional lumber and plywood soared.
On the flip side, professional-driven renovations have held steady and continue to trend in a positive direction. Part of this likely reflects the structural change in the nature of work; according to the Survey of Working Arrangements and Attitudes, 4-6 times more people now work from home versus before the pandemic, driving many new work-from-homers to renovate their home space. On top of this, these larger home projects are probably disproportionally impacted by home equity levels and interest rates, which many were able to take advantage of through cash-out refinances earlier in the pandemic before interest rates spiked.
Given these crosscurrents in R&R, what is the 2024 outlook for the category? While we expect the larger pro side of the market to continue to slow as households tighten their budget to compensate for lower savings levels, fiscal stimulus wears off and more home equity is “trapped” by very high interest rates, there are signs that the DIY side of the market is reaccelerating again. Pull-forward effects that cannibalized demand in 2022 and 2023 have likely worn off for DIY-friendly projects. Homeowners will probably take on any smaller or medium-sized projects because of budgets that have been tightened by elevated inflation. Our call is for the RRI to hold flat again this year, repeating the stagnant year of growth we saw in 2023.
As we stated last year, it’s no surprise that our view of the housing market largely dictates the demand outlook for lumber and other wood products. New residential construction and R&R combined account for roughly 70-80% of US wood products demand.
For full transparency, readers will be reminded that our call for lumber consumption last year was for a drop of about 2.2 BBF. We still have several months of industry data to be delivered before we can fully evaluate 2023 demand levels, but compared with our January 2023 forecast, consumption will likely have surprised to the upside by more than 1 BBF. This is largely due to the much more aggressive incentive measures taken by builders that we mentioned earlier, which helped soften the blow in consumption for the year.
From a volume perspective, a year slated for solid growth in single-family housing and flattish R&R demand suggests a volume-positive year for most wood product categories. Even with the further declines in multifamily that we are calling for in Prediction 2, it’s important to remember that single-family homes use roughly three times more lumber per start than a typical multifamily start — due to more floor space, a higher share of stick framed, etc. Single-family starts are also currently about double those of multifamily. There are other considerations also, such as shrinking home sizes and material substitutions, but even accounting for these factors, the arrow points up on softwood lumber demand in 2024.
Fastmarkets’ call for US softwood lumber consumption to advance by 1.7 BBF (3.4%) is by no means a gangbuster year of growth. In fact, it is very much in line with typical volume gains for the industry over the last decade or so. However, consumption reversing course after falling about 0.8 BBF (1.6%) in 2023 based on our latest estimates will be a welcome change for building material dealers, wholesalers and mills alike.
As we emphasized in last year’s “Predictions” piece and in our recent editions of the Lumber Commentary, there’s reason to believe month-to-month price volatility will remain elevated compared with the sleepy days prior to 2018.
However, market participants will need to accept that the volatility in the market witnessed from the spring of 2020 and through 2022 is behind us now. This was a black swan event, largely stemming from both demand and supply shocks directly tied to the pandemic that are now subsiding. Mill staffing and production has now recovered fully, the surge in demand from the R&R and single-family boom have corrected, and transportation and distribution are facing a fraction of the disruptions we saw in 2021 and 2022. We are now in a normal demand-supply equilibrium, which suggests the price-surge environment we saw for two years is over. This correction was clear in 2023, when the Random Lengths Framing Lumber Composite Price (FLCP) averaged $411 per MBF for the year, which we will proudly note was within $8 per MBF of our January 2023 forecast.
So, what is the good news for mill operators and traders in 2024? The demand rebound we anticipate in 2024 sets the industry up for tightening operating rates, which should carry prices higher. While supply continues to expand as southern yellow pine (SYP) capacity ramps up in the US South, closures and constrained log supply in the rest of North America will keep capacity gains modest, trending at a modest 1-2% in most years. This should provide the opportunity for demand growth to overshoot supply growth in 2024.
We predict Western SPF 2&Btr 2×4 will average $427 per MBF in 2024 and the FLCP will average $432 per MBF, which translates to mid- to high-single-digit growth in prices year over year. Prices at current levels are also not sustainable for a significant swath of the North American industry, namely dimensional lumber producers in British Columbia who are coping with variables breakeven levels in the low $400s per MBF for lumber delivered to the US (and notably still facing antidumping and countervailing duties). The salvo of closures we predicted and saw in 2023 reflects the challenging market environment for high-cost mills in North America.
As lumber prices gain upward momentum, temporarily curtailed sawmill capacity will come in from the sidelines. This will keep supply and demand in balance and temper the magnitude of the price increases. Competing sources of supply from offshore, particularly from Central and Northern Europe, which has gained share over the years, will also keep the market in check. While the year-over-year gains in dimension lumber prices will be modest, a year of net price appreciation will still be a welcome development for much of the wood products supply chain.
Finally, what about the supply side of the lumber market? After a year of significant capacity rationalization, what should we expect in 2024? Our key prediction is that US sawmill production will hit its highest level since peaking in 2005, marking the second-highest level on record.
While 2023 was a challenging environment for mill operators, many sawmills in the US have been able to limp along through this market as Canadian operators took the brunt of the pain, with many of them cash-negative at prevailing dimensional lumber prices. This also explains the wave of Canadian closures we predicted and ultimately saw in 2023. SYP production, which accounts for about 38% of North American softwood lumber output, also has the added tailwind of very low delivered fiber costs. Most producers in the US South with modern, state-of-the-art sawmill operations are still cash-positive. We’ve also seen SYP capacity investment trending close to 1 BBF a year in recent years, which in most years was more than sufficient to counter capacity losses, particularly those in British Columbia.
The growing US share of the North American lumber market has been a secular trend driven ultimately by lower fiber costs in the rapidly growing US South but also accelerated by duties and managed trade for Canadian sawmills as well as the long-term consequences of the mountain pine beetle kill in British Columbia. This is a noteworthy development considering that historically, Canada has accounted for anywhere between a quarter to a third of US softwood lumber consumption.
The story of secular decline in BC production tends to dominate the narrative in the lumber industry, but the rise of the US lumber industry after a decade of pain stemming from the capital destruction brought on by the housing crash in 2008-10 remains an important part of the supply story. For commodities like lumber, the low-cost supplier tends to prevail over the long run. We are seeing this happen in real-time as SYP continues to fill the supply void, just as home construction and lumber demand is primed for a recovery in demand in 2024.
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