Five predictions for the North American housing and softwood lumber market in 2023
Will lumber demand drop and what does that mean for lumber prices? Fastmarkets’ Dustin Jalbert shares his outlook
After another year of unprecedented volatility, many are wondering what awaits the North American housing and lumber market in 2023. Will we see another sudden turnaround in prices that send us back toward record levels? Or will sluggish demand and pricing action persist through the year?
As we frequently remind our readers, the future is uncertain and market conditions can change rapidly. Traders and forecasters alike were repeatedly reminded of this with the unprecedented boom-and-bust cycles in wood product prices over the last three years.
Nevertheless, here are Fastmarkets’ five predictions for the lumber and housing market in 2023:
- Prediction 1: US housing starts will drop by double digits in 2023
- Prediction 2: Lumber demand will drop again 2023
- Prediction 3: The record volatility in lumber prices since 2020 is over
- Prediction 4: 1.5 BBF of closures slated in British Columbia
- Prediction 5: Inflation and interest rates will drop significantly
Prediction 1: US housing starts will drop by double digits in 2023
The new residential construction outlook in 2023 appears challenging, to say the least. New home sales in the US are off by 20-30% since the beginning of 2022 as prospective buyers cope with plummeting home affordability due to high mortgage rates and home prices. Also weighing on the production outlook are a historic number of homes currently under construction, creating a wave of “shadow” inventory that will be released to the market over the coming months. The combination of cooling shelter demand and a slow burn of steadily rising unit completions will further exacerbate the oversupply situation in the shelter market. This points to further pullbacks in housing starts ahead to rebalance the market in 2023.
While its almost unanimously accepted housing starts will fall in 2023, the expected degree that production will drop off from prognosticators such as ourselves varies widely. Fastmarkets expects housing starts to fall by 13% to 1.36 million units, which tilts toward the optimistic side relative to market consensus.
The picture looks particularly gloomy for single-family construction as mortgage rates continue to hover above 6%, pushing prospective buyers to the sidelines as they await an adjustment in home prices, wages and/or interest rates to make the monthly payments financially more palatable. Builders have also clearly communicated to the market the need to cut home production to align with the big drop in home sales. Our call is for single-family starts to fall by 16% to roughly 850,000 units in 2023.
While conditions look gloomy for single-family construction in 2023, we do think there’s more reason for optimism on the multifamily side of the market. Apartment demand has grown at a phenomenal pace since 2021, reflecting strong employment and wage gains that have sent national rents soaring. Developers have quickly responded with a wave of new units while returns remain attractive, but like single-family, completions have been bogged down by supply chain and labor woes.
Household formations and rent growth appear to have been rapidly turning over more recently, and financing conditions for new apartment deals are more challenging, both of which will put downward pressure on multifamily starts in 2023. Fastmarkets is calling for multifamily starts to drop 7% to about 510,000 units for the year. While headwinds await in multifamily construction, this would be well above the 350,000-400,000 SAAR trend levels that were typical prior to 2020 and would outperform the single-family market.
No doubt, 2023 will be a tough year for construction activity, but we believe there are still some silver linings for wood product producers and retailers to capitalize on even as single-family faces substantial headwinds.
Prediction 2: Lumber demand will drop again 2023
To no surprise, Fastmarkets’ view of the housing market largely dictates the demand outlook for lumber and other wood products. Our latest forecast calls for US softwood lumber consumption to fall by 4-5% (2.2 billion board feet (BBF)) to about 48.2 BBF in 2023. This follows consumption dropping by an estimated 1.6% (0.8 BBF) in 2022, which was driven by a sudden weakening in new residential construction activity in the second half of the year and a major correction in do-it-yourself (DIY) lumber demand.
A 2.2 BBF drop in US lumber demand would be the largest decline in volume seen in a single year since 2009, though for perspective, 2009 saw a whopping 8-BBF drop in a single year, reflecting the utter collapse of demand during the heart of the housing bust.
Moderating some of the demand losses will be a resilient, yet faltering, repair and remodeling (R&R) market. Although the DIY demand correction that has been a major drag on the market has largely run its course, big ticket, professional remodeling activity will likely begin to weaken soon as home equity falls in tandem with a drop in national home prices, unemployment begins to tick up in response to the Fed’s tightening cycle and much of the pent-up savings in the economy is burned off.
It’s important to remember that we are not looking at the kind of catastrophic demand losses the market experienced from 2005-09. Nonetheless, demand conditions for lumber will still be very challenging for building material retailers, wholesalers and mill operators in 2023.
Prediction 3: The record volatility in lumber prices since 2020 is over
Make no mistake, the variation in pricing for softwood lumber will likely be higher than the sleepy days pre-2018 when a $20-per-thousand-board-feet (MBF) move in a month was significant for many commodity items. Inventory remains lean downstream in the supply chain, transportation and distribution risks loom — namely rail — and log availability challenges in British Columbia and the Pacific Northwest will hinder supply expansion for much of North America. But the historic volatility we’ve seen since the spring of 2020 appears to now be in the rearview mirror.
The reasons for this? First and most obvious is that demand will continue to decline this year as laid out above. Market participants continue to cite lean retail inventory in the supply chain as a potential catalyst for a major price bounce as dealers remain cautious on their inventory positions. While lean inventory is usually a prerequisite to drive upward pricing pressure on a commodity like lumber, that alone is not sufficient; the market typically needs a combination of rising demand and lean inventory to drive a sustained price rise. This is clearly not the case in the lumber market as field consumption for framing material continues to fall.
The supply side of the market has also finally responded to record-shattering prices over the last three years. Sawmill output has ramped up slowly after being hindered by disruptions stemming from the pandemic, namely the furloughing of employees in the spring of 2020. While it has taken 12-18 months for mills to return headcounts to more normal levels, sawmill production has normalized and is now consistently running ahead of demand.
On top of this, the transportation and logistical disruptions that compounded production challenges — which was the defining feature of the price rally in late 2021 into early 2022 — have mostly subsided now as flatbed availability soars and rail deliveries continue to improve after major disruptions in winter 2021/2022. Abating pandemic-related supply shocks and falling demand means a much lower equilibrium price for lumber compared with the last three years.
So where will prices settle on average for 2023? We are predicting Western SPF 2&Btr 2x4 will average $402 per MBF for the year, and the Random Lengths Framing Lumber Composite Price will average $419 per MBF. Market prices for both indices continue to float below these levels as dealers remain very reluctant to restock inventory as recession concerns loom large. However, we suspect as seasonal demand picks up in the spring, we’ll see further price support in the market. Additionally, we believe a substantial amount of production cuts in response to currently weak pricing conditions will be the catalyst to balance the market.
Prediction 4: 1.5 BBF of closures slated in British Columbia
Which brings us to our next call for 2023: A substantial portion of industry capacity is set to close indefinitely or permanently over the next 12-18 months due to a combination of very weak market conditions and long-term fiber availability constraints.
Our current forecast is for 1.5 BBF of capacity to indefinitely or permanently close in British Columbia specifically. Increasing concerns over fiber availability, US anti-dumping and countervailing duties on Canadian lumber and a stubbornly slow stumpage pricing mechanism in the province are all factors keeping breakevens for sawmills producing dimensional lumber in the BC Interior well above market prices at the moment.
We’ve seen several rounds of temporary curtailment announcements over the last few months as mills look to match production with declining demand, but with little success in boosting cash market prices. In fact, based on our own internal tally that we’ve compiled for several years, announced sawmill curtailments in the fourth quarter of 2022 totaled over 0.7 BBF — or about 4% of quarterly North American capacity — which is the highest level since the onset of the Covid-19 pandemic in the second quarter of 2020.
We suspect many of these temporary curtailments will transition to indefinite or permanent closures in the coming months as demand conditions continue to be sluggish and lumber prices remain in the doldrums. This will be a key factor that helps tighten the market, particularly in the second half of 2023 when we expect demand will begin reversing course and the bulk of the production cuts will begin to be felt.
Prediction 5: Inflation and interest rates will drop significantly
While the outlook for the wood products industry looks rough for 2023, there’s reason for optimism, and that is largely due to the outlook on inflation and interest rates over the coming year. This piece of the macroeconomic outlook remains a huge wildcard that will ultimately determine the timing of the housing turnaround.
We are becoming increasingly optimistic US inflation is set to fall off significantly by the latter half of 2023 and fall much closer to the Federal Reserve’s 2% target, particularly as (1) wage and employment growth continue to decelerate, (2) apartment rents roll over and (3) energy inflation continues to show signs of abating. So much of the inflation story has been tied to an unprecedented sequence of supply chain disruptions (e.g., Covid-19, Russia-Ukraine war, natural disasters) that are now abating, particularly on the goods side of the economy.
So why is the outlook for inflation so important for housing and wood products demand? Clearly, the link between inflation and housing demand flows through the interest rate channel. Inflation taking off in 2021 to the highest level seen since the 1970s forced the Federal Reserve to take a hawkish approach, pushing the Fed Funds rate up by over 400 basis points since the start of 2022. The massive spike in market interest rates in 2022, including for mortgages, has been the pivotal factor sending the housing market into a deep freeze.
On the flip side, inflation should return closer to the Fed’s 2% target by the end of the year, providing an offramp for the Federal Reserve to end its overly hawkish tone and pause further tightening of financial conditions. In addition, rising unemployment over the coming months will also force the Fed to re-prioritize the second half of its dual mandate, that being maximum employment. Rate cuts to stave off a more serious economic slowdown are not out of the question before the end of the year. The shifting inflation picture and concerns about further softening in employment have already begun putting downward pressure on the 10-year treasury yields since October, which mortgage rates loosely track.
Mortgage rates dropping to the 5-6% range nationally would likely reinvigorate home-buying activity as monthly payments pencil out with household incomes, driving a reacceleration of single-family home production and wood products demand. While the forecast for cooling inflation sets up a much more positive picture for lumber demand in 2024, market participants will still have to navigate a painful housing recession in 2023 first.
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