Shy Lumber Stock Investors

Originally posted on Harderblog:

In describing today’s over-supply of softwood lumber, attendees at the NAWLA Regional Meeting in Vancouver will recall Peter Woodbridge’s super-saturated chemistry analogy. Expanding on the theme this week at Business Vancouver, Woodbridge now likens investors in lumber stocks to “the parents of a super-star high school student who inexplicably is at risk of not graduating.” It’s an edgy article aimed at investors that’s worth reading here. Highlighted points include:

  • “In explaining why lumber stock prices have fallen so quickly recently, it’s clear that Canadian lumber supply is the villain in the story. Unlike the pulp industry, which practises supply management, B.C. lumber producers prefer to keep their mills operating at high rates – even when demand softens, as it has at the moment.”
  • “They have been aided and abetted by the declining value of the Canadian dollar in U.S. funds. Softwood lumber is sold in U.S. dollars. So…

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Forgotten Characters from Forest History: Tim Burr

Originally posted on Peeling Back the Bark:

Everyone knows Smokey Bear, Woodsy Owl, and maybe even Ranger Rick Raccoon, but there are many other forest and forestry-related fictional characters that long ago fell by the wayside. Peeling Back the Bark‘s series on “Forgotten Characters from Forest History” continues with Part 16, in which we examine Tim Burr.

Tim BurrIn July 1949 the Weyerhaeuser Timber Company debuted the first issue of its new company-wide magazine. Weyerhaeuser Magazine was targeted to company employees and featured company news across the various branches, as well as features on Weyerhaeuser employees both on the job and away from work. The inaugural issue of the magazine also introduced to the world a brilliantly-named character: Mr. Tim Burr.

Tim’s purpose was to promote workplace safety, similar to previously profiled characters like Herman I. Cautious and Paula Bunyan. But unlike Herman and Paula, who were committed examples of proper workplace behavior…

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Forgotten Characters from Forest History: Joe Beaver

Originally posted on Peeling Back the Bark:

Everyone knows Smokey Bear, Woodsy Owl, and maybe even Ranger Rick Raccoon, but there are many other forest and forestry-related fictional characters that long ago fell by the wayside. Peeling Back the Bark‘s series on “Forgotten Characters from Forest History” continues with Part 15, in which we examine Joe Beaver.

Joe BeaverBefore there was a Smokey Bear or a Woodsy Owl, the U.S. Forest Service had another animal preaching the messages of forest conservation and fire prevention: Joe Beaver. Joe (an actual beaver, not the 8-time world champion cowboy) was the creation of legendary cartoonist Ed Nofziger, who worked for the Forest Service during World War II before moving on to the large animation studios of his day. The story of Joe Beaver’s creation is intertwined with Nofziger’s divergent career path into the world of forestry.

Ed Nofziger was born in 1913 and raised in…

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JCHS: Pent-Up Demand for Additional Household Formation is Fraught with Uncertainties

by George Masnick

Fellow

In early 2011, economists at the National Association of Home Builders (NAHB) reported that the slowdown in household formation that started in 2007 with the advent of the Great Recession had produced a 2.1 million household formation shortfall by 2010. The authors concluded that the demand for new housing should accelerate dramatically once the economic recovery releases this “pent-up” demand. Another pent-up demand calculation, by Jed Kolko at Trulia, estimated 2.6 million “missing households” in 2010. After three additional years in which the economy has improved on many fronts – albeit at a slow pace – the 2013 Trulia deficit in the household count was still estimated at 2.4 million. But how solid are these estimates and how likely is it that household formation rates will return to pre-recession levels?

 

One difficulty in making these calculations is that actual household growth estimates since 2007 vary considerably from year to year and are inconsistent among data sets (Figure 1). There is good reason to believe that the most widely used data to track household growth, the Housing Vacancy Survey (HVS, used in the NAHB calculation), has seriously underestimated the number of US households – and as a result household growth – since a revision in methodology in 2003.  The HVS’s average annual estimate of household growth since 2007 of 550-600,000 contrasts with the American Community Survey’s (ACS) estimate of 700-800,000 new households annually and the higher Current Population Survey (CPS) growth numbers of over 1 million new households annually since 2010. Without agreement on actual levels of household growth since 2007, it is quite impossible to gauge the shortfall in growth, and therefore the probable level of pent-up demand.

052114_masnick_figure1


Notes: 2013 ACS not available.  2010-2013 growth for the ACS a two-year average of 2010-2011 and 2011-2012 data.

 

The method used to estimate the “normal” level of household growth also matters. The NAHB number was based on a simple difference between “actual” household growth estimates for the 2007-2010 period, and a straight line trending of HVS household growth prior to 2007. Over the very short run this approach may be appropriate, but would not be expected to hold up over a longer period.

 

Kolko’s calculations are more sophisticated. Using CPS data, he computes the change in age-specific headship rates (the share of persons in an age group that head an independent household) from the average 2000-07 pre-recession levels. This change, when multiplied by the official annual population estimates for each year, gives the deficit in number of household formations in each age group due to changes in the propensity to form households. This method corrects for the effects on household formation of simple changes in the size and age structure of the adult population, which the NAHB method does not take into account. But what Kolko’s calculation does not control for is the increasing share of minorities in the population. And since Hispanics and Asians have lower headship rates than non-Hispanic whites this oversight is not trivial (Figure 2). In fact, a certain amount of the decline in household formation is due to the changing race/Hispanic origin composition of the population and not to the recent economic downturn.

 

This issue is exacerbated by an undercounting of growth in Hispanics and Asians over the past decade, as revealed by the results of the 2010 Census. The underestimating of Hispanic and Asian shares of the population in the CPS during the 2000s also means that pre-2010 CPS headship values are biased upward by overcounting the white share, due to incorrect population weights in the CPS survey, making the 2000-2007 benchmark headship rates too high, and exaggerating the decline in age-specific headship pre-versus-post recession.

 

Even controlling for both age and race/Hispanic origin in the different surveys, we know that household formations have slowed relative to pre-recession levels, we just do not know by how much given concerns just discussed. We also know that the slowdown is likely a consequence of the recession. But, we are uncertain about whether the reduced level of household formation has been primarily driven by economic factors, or whether it is the result of more fundamental changes in attitudes and behavior regarding independent living by today’s young adults that might be partly recession-driven, but may also have deeper roots.

 

Lower rates of labor force participation, lower incomes of those in the labor force, rising rents, greater student loan debt and tight mortgage lending conditions are economic factors that could partly explain low levels of independent household formation. But we do not know whether these effects are likely to be short-term or long-term as an improving economy and governmental initiatives could reverse many of these factors quite quickly.

 

But trends in college and graduate school enrollment, the structure of the labor force, the timing of marriage and childbearing, and attitudes about co-residence might lead millennials to form independent households according to a different timetable than the generations that preceded them, regardless of economic conditions. Going back to school for retraining is becoming increasingly necessary for technology oriented jobs in a rapidly changing economy. Employment in start-ups, freelance work, and spells of temporarily working long hours in different jobs and on various projects, followed by periods of downtime, are increasingly common. The timing and sequence of important life-course decisions such as co-habitation, marriage, and childbearing have become more fluid. Intergenerational interdependency at various life-course stages has also changed, with parents playing a larger role in financially supporting their children as young adults, in helping to raise grandchildren, and in opening their homes for spells of co-residence when their children ask. These factors may have inertia that will make them less responsive to economic changes.

052114_masnick_figure2
Source: Joint Center tabulations of CPS data.  Average of 2011, 2012 and 2013 values.

 

And even if market forces are the primary reasons for depressed rates of household formation, geographic variations in job and income growth and housing costs and availability mean that the magnitude and pace with which pent-up household formation is released should vary in different parts of the country. For all these reasons calculations about the extent of pent-up demand for housing and speculation about its causes, when demand will be released, and what kind of housing will be required to meet future demand are fraught with uncertainties. The latest Joint Center household projections hold household formation rates constant at average 2011-2013 levels, making no allowance for the future release of pent-up demand, and should therefore be considered conservative.

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BFRI: Residential Remodeling in March 2014 is DOWN 7%

Residential remodels authorized by building permits in the United States in March were at a seasonally-adjusted annual rate of 2,771,000. This is down 7% from the revised February rate of 2,994,000 and is down 2% from the March 2013 estimate of 2,841,000.

Regional Residential Remodeling

Seasonally-adjusted annual rates of remodeling across the country in March 2014 are estimated as follows: Northeast, 578,000 (up 8% from February and down 5% from March 2013); South, 1,398,000 (down 2% from February and up 18% from March 2013); Midwest, 399,000 (down 3% from February and down 30% from March 2013); West, 697,000 (down 7% from February and down 6% from March 2013).

About the BuildFax Remodeling Index

The BuildFax Remodeling Index (BFRI) is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are based upon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally-adjusted using the X12 procedure.

Historical Values and Subscription Information

The BuildFax Remodeling Index is available as a monthly email with an Excel spreadsheet attachment. Each month’s release contains the full list of historical values for the country and each of the four regions, going back to August of 2004. When you subscribe, you will receive the most recent release within one business day. Click here to subscribe for $150/year. You can also subscribe to the free data release mailing list, which delivers the information you see on this page by email each month.

About BuildFax

BuildFax is the creator of the first and only national database of historical building permit data. Headquartered in Asheville, North Carolina, BuildFax has created a proprietary property intelligence engine that contains building and permitting information from 5,000+ cities and counties throughout the country. As the best and only source of a structure’s “life story,” the BuildFax database continues to grow, currently covering over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

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JCHS: How Can Remodeling Companies Achieve the Benefits of Scale?

by Abbe Will

Research Analyst
The residential remodeling industry faces many obstacles to scale economies, including low barriers to entry, volatile business cycles, highly customized work, and difficulty attracting capital. For this reason, the industry continues to be highly fragmented, with the vast majority of remodeling companies operating as relatively small, single-location businesses that likely will not experience any significant growth over their life-cycles. According to data from the U.S. Census Bureau, the average size of remodeling contractors with payrolls, in terms of annual revenue, is significantly smaller than in other major sectors of the economy: about one-third the size of firms in the broader construction sector, one-fifth the size of retailers and about one-tenth the size of wood product manufacturers (Figure 1). Indeed, residential remodeling contractors are even smaller in scale than the typical business in the fractured restaurant and hospitality industry.

Notes: Depending on the sector, average size is calculated using employer value of sales, shipments, receipts, revenue or business done. * FIRE denotes the finance, insurance and real estate sectors. Building material dealers are a subsector of the broader retail trade sector. Residential remodeling contractors are defined as general and special trade establishments with more than 50% of receipts from remodeling activity including maintenance and repair, and are a subset of the overall construction sector. Source: JCHS tabulations of published and unpublished data from the U.S. Census Bureau’s 2007 Economic Census of Construction.
 

Yet, evidence suggests that remodeling firms able to overcome these obstacles enjoy significant benefits from scale. Better understanding of the ways in which remodeling companies are overcoming the many hurdles to scale, as well as how industry manufacturers, distributors, and franchisors are supporting scaling and consolidation efforts within the industry, can provide insight into how the industry is likely to continue evolving over the next several decades.

My new Joint Center working paper documents key findings on this topic gleaned from in-depth interviews with dozens of industry leaders who have either successfully established larger-scale companies or are otherwise supporting scaling and consolidation efforts within the industry. A few key themes emerged:

Specialty Remodeling Businesses are Generally Easier to Scale than Full-Service Firms

Most of the largest remodeling companies today are specialty firms: replacement roofing, siding, windows, doors, flooring, or painting businesses, for example. Specialization allows companies to develop greater efficiencies in their operations and obtain more favorable pricing on materials compared to full-service remodeling firms. Specialty projects also tend to be relatively straightforward and less labor intensive for scheduling and installation, which means shorter job cycles and higher margins. Specialty firms have been pursuing scale in the remodeling industry by heavily focusing on corporate sales and marketing strategies and by integrating vertically (i.e. the company owns the supply chain).

Manufacturers & Distributors are Playing a Significant Role in Supporting Contractor Scaling

Manufacturers and distributors, including retailers, arguably have the greatest motivation and investment capabilities for influencing scaling and consolidation in the industry through their installed sales and preferred contractor programs. Such programs encourage further specialization of remodelers and offer training and expertise in professional marketing, sales, installation, and business systems to help contractors improve their operations. Installed sales and preferred contractor programs push industry standards by requiring licensing, insurance, minimum years in business, and good business and customer satisfaction practices of participating contractors. Manufacturers and big box retailers will surely continue to leverage their national trust and brand recognition to further expand installation services to consumers, though it is unclear whether they will move further into this space through in-house expansion or through acquisition of established contractor companies. Either way, manufacturers and distributors will likely be a formidable force behind ongoing consolidation in the industry.

Franchising and Licensing are Proven Strategies for Growing a Remodeling Business 

Franchising, licensing, and similar business models have already been successful strategies for growing a remodeling business toward a national presence. Such models allow a business to quickly expand its brand recognition and market reach without investing significant capital in acquiring new locations or managing each independently-owned and operated franchise, dealer, or affiliate. Through such agreements, franchisee companies gain a recognized brand name, proven business systems, training and marketing support, and access to a peer network of other franchisees for best practices advice. Overall, franchising and related efforts in the remodeling industry tend to be more successful with specialty businesses because of their streamlined operations. Also, since installation is relatively simple and systematic, specialty firms tend to focus strongly on sales and marketing for achieving scale.

The home remodeling industry will likely always include some amount of fragmentation due to low barriers to entry and other challenges to scale. While the industry may never reach the same level of concentration as other industries in the broader construction sector, the sheer size of the home remodeling market—which the Joint Center estimates at $300 billion annually—and its continued fragmentation present major opportunities for companies that are organized, differentiated, and focused on brand-building.

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BFRI: Residential Remodeling in February 2014 is DOWN 3%

Data Release: April 16, 2014

Residential remodels authorized by building permits in the United States in February were at a seasonally-adjusted annual rate of 3,020,000. This is 3% down from the revised January rate of 3,118,000 and is down 3% from the February 2013 estimate of 3,108,000.

Regional Residential Remodeling

Seasonally-adjusted annual rates of remodeling across the country in February 2014 are estimated as follows: Northeast, 524,000 (down 10% from January and down 22% from February 2013); South, 1,423,000 (down 2% from January and up 20% from February 2013); Midwest, 408,000 (up 1% from January and down 42% from February 2013); West, 760,000 (down 4% from January and down 1% from February 2013).

About the BuildFax Remodeling Index

The BuildFax Remodeling Index (BFRI) is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are based upon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally-adjusted using the X12 procedure.

Historical Values and Subscription Information

The BuildFax Remodeling Index is available as a monthly email with an Excel spreadsheet attachment. Each month’s release contains the full list of historical values for the country and each of the four regions, going back to August of 2004. When you subscribe, you will receive the most recent release within one business day. Click here to subscribe for $150/year. You can also subscribe to the free data release mailing list, which delivers the information you see on this page by email each month.

About BuildFax

BuildFax is the creator of the first and only national database of historical building permit data. Headquartered in Asheville, North Carolina, BuildFax has created a proprietary property intelligence engine that contains building and permitting information from 5,000+ cities and counties throughout the country. As the best and only source of a structure’s “life story,” the BuildFax database continues to grow, currently covering over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

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