Super Stuff

In 2010 and 2011, attendance at the NAWLA Vancouver Regional Meeting averaged 150. In 2012, there were 170 registered attendees. April 2nd marked the third consecutive year that attendance has blown past 200 in a packed Grand Ballroom at The Vancouver Club. During the evening networking session, many attendees remarked how much they enjoyed the diverse themes offered up by our professional presenters at the afternoon meeting: Bob Lenarduzzi (Vancouver Whitecaps FC), Peter Woodbridge and Kim Marshall (Woodbridge Associates), and Gavin Dew (Trans Mountain Expansion Project).

Of note, forest industry and wood product consultants Peter Woodbridge and Kim Marshall left attendees buzzing about their “Super-Saturated” chemistry analogy to describe present market conditions. According to Woodbridge Associates, there are seven factors fueling today’s over-supply of softwood lumber:

  1. China Lumber Supply, diverted to the U.S. market
  2. China/Asia Log Supply, diverted (in part) to the U.S. market
  3. Currency-Fueled SPF lumber (C$), muting the intended impacts of Softwood Lumber Agreement (SLA) supply management
  4. Currency-Fueled Euro Lumber (Eu) diverted from the MENA market
  5. Currency-Fueled Russian Logs/Lumber (RUB), selling into Asia/Europe
  6. Low Tax-Rated Canadian public timber, partially offsetting rapidly rising structural wood costs in many parts of Canada
  7. ‘Coming of Age’ of U.S. South Southern Yellow Pine industry, as dominant supply region and price setter. 87% of 2014 production growth = U.S. Mills.

Woodbridge suggested “Super-Saturated Supply” will continue to dominate lumber markets and ‘hold-down’ lumber prices this year. And while too early to declare a trend in critical Texas, they cited Q1 warning signals in lumber demand, ripple effects from the oil price collapse. Their in-depth analysis charting multi-family vs single family home building, particularly in the South, was eye-catching.

At the same time, Woodbridge cautioned that Super-Saturated Supply is temporary, confirming predicted lumber super cycle fundamentals are “alive and well”; super cycle timing has simply been “pushed forward”. Also of note, in Woodbridge’s view, the SLA will be renewed (October 2015), but with a ‘kicker’ in the form of a ‘re-calibration’ which will be priced into Canadian SPF from 2016 onwards.

More Signs of Spring

It’s generally recognized that distributors have a knack for adapting to unfolding market condition demands. The Framing Lumber Composite Price has fallen $50 this quarter. It’s rumoured that some have adapted to conditions by starting happy hour at noon. I heard someone suggest that the B.C. Wholesale Lumber Association may even consider early voting for next year’s Lumberman of the Beer.

Traders hold their collective breath over yet-to-be-determined/undetermined mill “policy” in view of April’s five per cent export charge. Even so, encouraging signs are beginning to emerge. Sales of newly built single-family homes last month in the U.S. reportedly reached their highest level in seven years. A bullish post today at HousingWire.com suggests new home construction is poised to pick up steam. As Mark Kennedy at CIBC reminded me this morning, “patience grasshopper”.

On the heels of blooming cherry blossoms in these parts comes news of Toronto Garden Club ladies exhibiting bikinis made from flowers and foliage. Surely signs that spring is in the air.

Snow and Stuff

When the Canada Mortgage and Housing Corporation (CMHC) published results of their survey aimed at measuring foreign ownership levels in the Canadian housing market, few believed the results. According to CMHC, rental condos under foreign ownership were just 2.4% in Toronto and 2.3% in Vancouver. Economists questioned the calculation methods. CMHC acknowledged “data gaps”. So it was interesting to hear that by all reports, Bob Rennie’s presentation at the B.C. Wholesale Lumber Association Smoker earlier this week was refreshing for its candor. Rennie unequivocally confirmed offshore money is largely responsible for supporting recent real estate activity in Vancouver and across the Lower Mainland.

While the drop in the Canadian dollar against U.S. currency is encouraging Canadian lumber exports to the U.S. market, both sides of the border are searching for direction amidst diverse economic and financial variables at play. All of this going on at the same time as winter weather has been doing its best to upstage Super Bowl hype. The time-lapse video below aired on CNN last night, capturing what 34 inches snowfall looked like in Berlin, Massachusetts.

Jerry Howard in the house..

One of many highlights from an invigorating week on the road was the opportunity to listen to Jerry Howard, CEO of the National Association of Home Builders (NAHB). What a speaker. LMC Expo 11-12-14And with more than 25 years of lobbying and association experience in Washington DC, to suggest that Howard is ‘in the loop’ is to state the obvious. It’s evident the overriding concerns surrounding polarized political views continue to plague Congress. Some takeaways from Jerry Howard’s speech at the LMC Forest Products & Building Materials EXPO in Philadelphia November 11th:

  • Adaptation is what’s kept builders alive (remodeling, light commercial) – “those who survived the recession were the most adaptable”
  • NAHB had 250,000 members prior to recession; 130,000 today
  • Large, publicly-traded home builders only account for 25-30% of housing market activity – rest of the builders account for 70%
  • Those publicly-traded companies were most concentrated in the hottest markets –  the hardest hit markets in the recession
  • Since World War II, housing has led the economy into recession and housing has led the economy out of recession – but the financial sector collapse of 2008 was unprecedented
  • Policies of the Federal Government aimed at promoting home ownership are to blame for the collapse – “banks found creative ways to get people into housing” – underwriting mortgages = “good policy taken too far”
  • Now “unbelievably restrictive to get a mortgage”.. as result there are “no first-time home buyers in the market”
  • Inability of first-time buyers to get a mortgage is what’s impeding the market
  • Production will only come back when mortgage policy is loosened – Need to search for and find compromise in face of inability of representatives of government to solve differences on issues
  • Availability of credit also big challenge for builders
  • There is pent up housing demand historically that needs to be met – “1.4-1.6 million housing starts = organic demand” – owning a home “still part of the American dream”
  • Millennials want urban living but when they have a family they still want a single family house with a backyard in a good school district
  • Biggest thing home builders want from suppliers is consistency: consistency of product availability, quality, and price
  • “Recession took us for a loop” but “business people who survived the recession will have the wherewithal to see us through”
  • Emergence of “co-located” trade shows post-recession; NAHB International Builders Show and Kitchen & Bath Industry Show combine in January
  • Forecast for “1.2 to 1.4 million” U.S. housing starts in 2015 raised a few eyebrows!

Urbanization and Lumber

What’s urbanization got to do with lumber we might ask. Plenty, according to a new report from PricewaterhouseCoopers (PWC) and the Urban Land Institute. Their top trends in real estate for 2015 identify where markets are defining need for accommodation. We’re told the urbanization of America has turned nine-to-five cities into 18-hour centers: “Downtown transformations have combined the key ingredients of housing, retail, dining, and walk-to-work offices to generate urban cores, spurring investment and development and raising the quality of life for a roster of cities”. And it’s not just Millennials pouring into those urban cores. Baby boomers are also reportedly moving downtown, instead of into warm-weather golf communities.

Here at home, the transformation of downtown Vancouver has come in the form of an explosion of young families. According to the 2011 census, the number of children downtown under five doubled in the previous five years. “Hundreds of families are choosing to stay in downtown Vancouver after they have children instead of fleeing to the suburbs as previous generations have,” attests The Globe and Mail. At the same time, hundreds of families from the suburbs are downsizing for the many conveniences of downtown living. City planners, unfortunately, did not foresee downtown becoming such a hub for families. We’re short schools. Living in the heart of downtown Vancouver, it will be an anxious time not knowing if our little skater below will luck out in the lottery system to see who gets into our Yaletown neighborhood school next September. Kindergarten registration opens November 1st.

Remember When

Back in 2011, the North American Wholesale Lumber Association (NAWLA) Regional Meeting in Vancouver featured three excellent speakers: Daryl Swetlishoff (Head of Research, Raymond James Ltd), Oscar Faoro (Special Projects, Canadian Wood Council), and Jim Jia (President, L J Resources Ltd). I recall catching up with Oscar following his informative presentation on multi-family, sustainable densification. He openly laughed at analyst projections that U.S. housing starts would return to 1.4 million by 2014. “It’s not going to happen like that!” asserted Oscar.
… Fast forward to today. Housing starts are at an annual pace of 976,000. The rate of multi-family starts grew by 21% in the first eight months of the year, while single-family starts grew just 2%.

Today’s MNI News Reality Check here is packed with surprisingly forthright quotes. It’s a good read. In the piece, Paul Jannke of Forest Economic Advisors, a bull in a Bruins jersey at NAWLA Vancouver 2012, now contends that demand for housing will not sustain an upturn in lumber prices. Says Jannke, “If you’re selling 400,000 (homes), why do you need to build 1.4 million? If you look at the actual demand for housing, it’s not as high as people think it is.”
… Could it be that housing starts data has taken on “a different meaning for the lumber industry”, as Shawn Church at Random Lengths suggested here, back in March?

“Lumber producers are making a lot of money producing lumber right now, and what do you do when you make a lot of money? You produce more lumber. It’s unlikely that we are going to see a significant increase in lumber prices.”
– Paul Jannke, Forest Economic Advisors (Sept. 2014)

Home Sweet Home

Inextricably tied into lumber market activity, home values make news on both sides of the border. In Canada, where it’s reported house resale prices are 66% higher than resale prices in the U.S., we’re told real estate now accounts for more of the economy than oil and gas and manufacturing combined. In a blog post this week, former MP Garth Turner confirms, “Canadians have decided there is only one asset they can trust – their homes, regardless of the cost.” Pointing to “artificially cheap money” over the past five years, he says that here in Canada “real estate became a cult, then a mania and finally a religion. As a result, risk has elevated exponentially… Half of us couldn’t survive one missed paycheque and the Millennials can’t climb out of basements.”

I received an email this morning from a personal connection in Southern California who read the same post. He writes, “Them be dire words from Garth Turner and must be most concerning for Canadians who witnessed the U.S. market meltdown. We know the wrath of a market meltdown on a personal basis. We purchased our Murrieta, CA home in September 2001 before the price run-up which was not the case for thousands of homeowners who lost their homes to foreclosure.” He references the assessed values of his house (see below) from the purchase through the bursting of the bubble and to the present, while adding his own comments. He notes: “A lot of homes were sold in our development during the years 2005-6-7 with virtually 100% of those buyers walking away from their underwater mortgage.”

Sept 2001 – $317,000 .. Purchase Price

Dec 2002: – $337,000

Dec 2003: – $377.000

Dec 2004: – $413,000 .. Should we buy that waterfront property?

Dec 2005: – $450,000 .. Lets rather take out a home equity loan

Dec 2006: – $600,000 .. and buy that villa in Spain.

Dec 2007: – $710,000 .. This sure does beat working for a living.

Dec 2008: – $400,000 .. What happened?? Not our best year ever.

Dec 2009: – $325,000 .. Talk about a hair cut!!!!!

Dec 2010: – $300,000 .. Yikes.. Hang on.. this thing’s no joke!!!

Dec 2011: – $310,000 .. Maybe as a greeter at Walmart you say???

Dec 2013: – $450,000 .. The forecast suggests the storm is waning.

Sep 2014: – $420,000 .. Not sure if we can stop holding our breath…yet..

Single Family Shortfall

While the good news in reported U.S. housing starts is an 8% increase year over year, clearly the annual pace of single-family construction is falling well short of early projections. As noted in a February post here, a forecast from the National Association of Homebuilders (NAHB) called for single-family production to reach 822,000 units this year – an increase of 32 per cent over last year. The August data released this morning indicates an annual pace of 643,000 – an increase of just 4 per cent. The data underscores ongoing uncertainties hanging over housing activity despite confirmation of continued low interest rates coming out of Fed reports this week.

Meanwhile, the NAHB confirms softwood lumber prices rose 2.4 per cent in August, but are down modestly from an earlier March peak. In the face of gradually increasing demand for building materials, the NAHB attributes price softness to “additional productive capacity being brought back to the wood products sector”. As one lumber trader was overheard to say, “Nothing solves high prices like high prices”.

Easy Credit

It’s summertime, and the song I heard on the radio recently promised ‘easy livin’ but no ‘easy credit’. Unfortunately Summertime promises no new insights on the U.S. housing market’s reported stall.

Based on recent data, anticipated improvement in housing activity has been hampered in large part because of credit restrictions. According to Zillowcredit availability is the biggest issue in the housing market today. Mark Kennedy, CIBC confirms “employment is improving, payment burdens from student loans are gradually declining, but credit standards remain the challenge.” The Street explains why U.S. banks are wary of making loans.

Conversely, the easy credit – not to be confused with ‘easy livin’ – is said to be found in Canada’s easy credit fuelling our condo economy. Cash-back mortgage schemes are available (where the lender provides the 5% required down payment in exchange for a higher rate) – or the down payment can be borrowed from a line of credit, personal loan, or credit card.

Could a fundamental shift in housing preferences among younger Americans also be contributing to sluggish single family housing starts? Construction is largely demand-driven, and “some have argued that the Great Recession resulted in a profound shift in preferences for millennials toward renting,” according to Jason Furman, chairman of the Council of Economic Advisors (HT: Mark Kennedy)

Conversely, here in Canada, kids are buying condos before they get cars. The scenario has some analysts expressing increasing concern over what happens when there’s a shift away from easy credit.

“Halfway Home”

A fresh chart from Trulia today illustrates how quickly the U.S. housing market is moving back to normal. It reveals improvement in all but one of the five market indicators since Q1. With regard to new construction, Trulia reports “starts are 50% back to normal, up from 45% one quarter ago and 41% one year ago. Multi-unit starts – mostly apartment buildings – are leading the recovery: in 2014 so far, multi-unit starts accounted for 35% of all new home starts, the highest annual level in 40 years. This apartment boom started last year, and last year’s starts are now being completed, which is increasing the supply of apartments for rent.”

MD-235-Housing-Barometer_Q22014

“While the spring selling season was softer than anticipated by us and the investor community, the homebuilding recovery continued its progression at a slow and steady pace. The fundamentals of the homebuilding industry remain strong driven by high affordability levels, favorable monthly payment comparisons to rentals, and overall supply shortages. Demand in most of our markets continues to outpace supply, which is constrained by limited land availability.”
– Stuart Miller, CEO of Lennar Corporation, speaking today