Prices down, rates up, Housing starts wobble

Prices down, rates up, Housing starts wobble

July 11, 2013

Timber Industry Report
By Rick Sohn, PhD
Coquille LLC

Good news/bad news. Product prices are down and mortgage rates are up. Housing starts are lackluster, but unsold inventory is down. Seven-year trend of lumber, logs, housing, and mortgage statistics are shown below.

chart-sohn-july13

Interpretation
The housing recovery has entered a readjustment phase. Product prices have decreased one third in just two months, reacting to over-supply, from a high of $445 down to $290 per Thousand Board Feet. There has been an equally dramatic increase in the 30-year fixed rate mortgage – a half percentage point rise in the last week alone, and a and a full percentage point rise in the last 7 weeks.

Housing Starts and Building Permits are also down, compared to the regular monthly records over the last year.

In good news, Median home prices continue to inch up, but are still well below previous highs. And unsold home inventories have continued to drop, now to their lowest level in 7 years – 2.5 months.

Good news/bad news also involves log prices, which normally trail product prices. Log prices tracked here, have stayed within a $20 range between January and June, after an $89 rise from December to January 2013, and a $37 rise from October to December. But the latest drop in product prices, if it holds for the rest of the building season, suggests that log prices will drop quite a bit further in the next few months.

If you are a mill, the combination of slowly adjusting log prices and decreasing product prices creates a squeeze on net income.

Industry economic analysts at a session hosted by Northwest Farm Credit Services, expressed optimism about the future of log and lumber consumption and prices, over the next 3-5 years. However the industry itself remains skeptical, and Random Lengths this week, reported “10 reasons to be cautious about the housing recovery.” The reasons include the rise in interest rates, and a drop in the percentage of home ownership from 69.1% to 65% and an accompanying increase in apartments being built, which require only about one third as much wood as a home.

Weyerhaeuser has shown its strong optimism with the long term wood products business recently. They purchased the Longview Timber lands, located in the Northwest. This purchase, for $2.65 billion, added 1/3 to its Pacific Northwest holdings, an addition of 645,000 acres. This brings Weyerhaeuser’s total for the Pacific Northwest to 2.6 million acres, and, and nearly 21 million acres in North America.

There is a breather in some parts of the recovery, according to the economists, and the pent up demand of people to own a new house, the overall trend of the wood products industry should remain very positive over the next few years. Most likely, the slowdown in some sectors is seasonal and the result of rebalancing inventories and production that creates growing pains.

Data reports used with permission of:
1) Random Lengths. Through Sept. 2012, 2”x4”x8’ precision end trimmed hem-fir stud grade from Southern Oregon mills. Starting Oct. 2012, consolidated with Kiln Dried Studs, Coast Hem-Fir 2x4x8’ PET #2/#2&Btr. Price reported is Dollars per Thousand Board Feet, generally the third week of the month. One “board foot” of product measures 12 inches by 12 inches by one inch thick.
2) RISI, Log Lines. Douglas-fir #2 Sawmill Log, Average Region 3 Southern Oregon price. Current report is for the prior month, in Dollars per Thousand Board Feet of logs, Scribner Scale. The standardized Scribner Scale includes expected saw trim waste, so a log board foot is much more wood volume than a product board foot.
3) Dept. of Commerce, US Census Bureau. New Residential Housing Starts and New Residential Construction Permits, seasonally adjusted, annual rate. Current report is for the prior month. Recent reports are often revised in bold. Also, major revision made each May, reaching 2 1/2 yrs back.
4) Regional Multiple Listing Service RMLSTM data, courtesy of Janet Johnston, Prudential Real Estate Professionals Broker, Roseburg, OR. Inventory of Unsold Homes (Ratio of Active Listings to Closed Sales) in Portland Oregon, for most recent month available.
5) Freddie Mac. Primary Mortgage Market Survey. 30-year Fixed Rate Mortgages Since 1971, national averages. Updated weekly, current report is for the prior full month.
6) Mortgage-X Most recent weekly rate of 30-year Fixed Rate Mortgages, national average.
7) Zillow.com Median value of homes sold in the United States during the month, weighted according toeach area population. The Median removes the effect of outlier expensive homes, with equal numbers of homes above and below the median value each month. Revisions in bold
Issue #6-6. © Copyright Rick Sohn, Umpqua Coquille LLC.

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