We’re told that “rising material costs” were a significant factor in the wake of 51% of U.S. home builders raising prices last month. This according to surveys conducted by John Burns Real Estate Consulting, noting this ratio marks only the second time in the last 10 years more than half of new home communities raised prices – the highest rate since the dramatic surge in U.S. housing prices in 2013. Meanwhile The Economic Calendar reports here that “cost pressures” can help to explain why housing starts and permits have been relatively uneventful over the past few months. The National Association of Home Builders (NAHB) suggests that this trend of firming confidence in the face of underwhelming housing data is liable to continue due to “supply-side issues.”
Aside from unprecedented seasonal B.C. wildfire impact on lumber markets, restricted fibre supply looms on the horizon. At the same time as questions of housing affordability challenge builders and consumers across the continent, does it make sense for narrowly defined interests of The U.S. Lumber Coalition to seek further price-increasing tariffs on lumber imports?
Some of the groups that are hurt by foreign competition wield enough political power to obtain protection against imports. Consequently, barriers to trade continue to exist despite their sizable economic costs.
– The Concise Encyclopedia of Economics
More: Canadian Wildfires Choke Lumber Supply to U.S. Home Builders – WSJ
with Clark Ellis, LMC Forest Products Expo (4 Nov 2016)
Frictional Factors are said to impede process or progress. One of the highlights each year of the LMC Forest Products and Building Materials EXPO in Philadelphia is the keynote speaker at Friday’s breakfast. This year featured Clark Ellis, Founder and CEO of Continuum Advisory Group, a management consulting firm that works exclusively with the homebuilding and construction industry. His hi-speed presentation explored ways to improve your business in a world of rising demand and constrained resources. While re-confirming that the biggest constraints in the U.S. housing market recovery are land and labour, he stressed the need to minimize frictional factors. “Complexity is the enemy of velocity!” declared Ellis. “Reduce complexity throughout your organization to increase velocity and enhance your flow rates.”
Ellis talked about the Margin vs Velocity Mental Model, explaining that because “margin is what we know and it comes naturally to us,” companies tend to focus too much on margin. According to Ellis, “in a resource-constrained environment, collaboration trumps adversarial cost-based selection every day of the week.” Rather than focus on ‘more work’ and margin, build strategic relationships with suppliers and customers. “Instead of asking for more, ask ‘how are we doing?'” advised Ellis.
Ellis stressed that feedback – from both employees and customers – is critical. “If you are not measuring employee engagement on at least an annual basis, you are missing one of the most powerful and critical indicators of future business results.” Ellis argued that customer experience must also be measured, tracked, and used to make better managerial decisions. “Mapping and optimizing ‘customer touch points’ is crucial.”
Continuum’s four biggest opportunities to improve your business in today’s constrained environment:
- Understand and visually represent your business processes
- Drive a velocity mindset through your company and its external network
- Change your concept of trade and supplier engagement
- Understand that employee engagement drives customer experience which drives business results.
The 2016 LMC Forest Products and Building Materials EXPO was brimming with lumber dealers feeling upbeat about 2016 to date and bullish on 2017. However a number acknowledged significant business was pulled forward/covered in advance of the October 12 standstill expiry. Moderating activity since that time also helps to explain the present supply-demand imbalance. The skittish tone and extreme hand-to-mouth buying patterns in evidence suggest dealers, wary of winter and working down inventories for year-end, are perhaps content to “run out the clock” on a good year.
A number of forest analysts were projecting that while we are in midst of a long period of strengthening lumber markets, prices could fade this summer due to increasing production on both sides of the border. The 20% jump year-over-year in U.S. housing starts experienced in Q1 was widely explained by the mild winter compared to 2015. While no one projects another 20% jump in starts this year, homebuilding activity continues to grind forward. Demand for lumber has been surprisingly strong through mid-August. Notably, the Framing Lumber Composite Price is up almost 20% since the Softwood Lumber Agreement expired last October.
The positive correlation illustrated below suggests the “surge” in cross-border shipments during the standstill period to date is largely demand-driven. The chart plots B.C. softwood exports to the U.S. per BCStats vs. the Framing Lumber Composite Price by month per Random Lengths (most recent data for softwood shipments is June; the Composite Price had climbed to $369 by the end of last week).
From early reports, BC’s new tax for foreign buyers effective August 2nd sent a chill through the real estate industry on many levels. Government data this week indicates that from June 30 to July 14, foreign buyers accounted for 15% of all real estate sales in Metro Vancouver. So it makes sense that imposition of the tax would tend to cool the overheated market. Still to be determined though is the extent to which wider ripples might be felt in outlying areas. At the same time concerns are reportedly being expressed over clarification of imposition of the tax on contracts that are works in process.
It is also a natural progression of the underlying asset, in this case real estate, which has become too expensive for the consumer to buy. In a competitive system, people will find creative ways to finance the boom. For it to continue, they must find ways to financially engineer it. All seems good during the boom times, then something, somewhere, comes out of left field, and the balloon gets pricked, never to reinflate in that manner again. Everything that seemed so sane, all of a sudden seems so totally insane. As Warren Buffett says: “You don’t know who’s swimming naked till the tide goes out.” For now, all is good in fairy-tale land, but this level of speculation has the ability to destroy the dreams of people for the next 20 years.
Vancouver real estate recently broke all records for volume. People can’t get enough. This is yet another necessary bubble component. Volumes are always highest at the top, never at the bottom. The panic to get in creates a gaping hole of demand in the future. For instance, let’s say over the next five years 100,000 people would normally buy real estate based on their family needs and other factors. The great euphoria and subsequent price rise, however, sucks that demand into this year, and it can be seen readily with today’s high volumes and skyrocketing prices. Who’s left to buy two years out? There has already been a massive flight of capital out of China of over $1 trillion. Will that continue endlessly? Of course not, the Chinese government will stop that at some point, leaving the locals of Vancouver and eastern Australian cities holding the bag.
– Thompson, Bob The Anatomy of a Housing Bubble. Macleans Magazine. 21 May 2016
My blogpost in early 2013 pointed to a news story about Blackstone, the largest private real estate owner in the United States. It was reported that in 2012 the company had begun spending $100 million a week buying houses. By 2013, those purchases had accelerated to acquire more than $2.5 billion in rental properties. See: Accelerated Purchases and related post All in.. On the U.S. Housing Recovery.
It’s interesting to learn this week Blackstone have in total amassed about 50,000 rental houses in the past four years. Housing as a commodity. But having first developed and adapted strategies as a buyer/landlord, the company is now adapting to changed market circumstances to become a seller. We’re told the company is beginning to sell “properties that have soared in value or no longer fit their business models”. Under a program called “Resident First Look”, renters get first look, enabling Blackstone “to benefit from having its own pool of ready buyers who are constrained by a market starved for affordable homes”.
On a related note, it’s revealing to see this list of price-to-rent ratios for American cities. According to Investopedia, a price-to-rent ratio of 1 to 15 indicates it’s much better to buy than rent, 16-20 suggests it’s typically better to rent than buy, and 21 or more means it’s much better to rent than buy. For example, with ratios below the 19.2 national average, a number of Texas markets are presently very favorable to homebuyers.
Observers of the bewildering real estate picture, in especially hotspots like Toronto and Vancouver (where the price-to-rent ratio is 55 in the east of the city and 72 on the westside), might be wondering how these patterns of housing dynamics could play out down the road in Canada.
So what’s to celebrate this week? Harderblog is five years old! What’s changed in five years? Media tell us the world has changed. The lumber business continues to change. Markets change. We’re learning that climate changes.
One of many significant changes captured in the blog archives is the bottoming/gradual recovery of the U.S. housing market. In February 2011, the seasonally-adjusted annual rate of housing starts in the United States was just 518,000 and the Random Lengths Framing Lumber Composite Price averaged $296. Today, starts have doubled while the Composite Price is barely 8% higher at $320. As one American dealer recently noted during our conversation re. lumber prices, “What is this, the 1950’s?!” If a new Softwood Lumber Agreement is negotiated before October, is it any wonder it will be a more restrictive deal than the last one and it won’t be good news for Canada?
Dec 25, 2015
Probably some of the most prominent changes I’ve experienced involve the fact that suddenly not only do I have the daily pleasure of fulfilling lumber requirements of valued customers, but also, I’m into negotiating the daily whims of an active six year-old daughter – with a four-year-old encore commanding equal time most days. On some days no doubt the opportunities awaiting attention at the office seem like welcome respite.. until I’m back home at night, where a small daughter’s smile wins me over.. and over.. reaffirming reality that fives years has gone by in a flash!
Amid the uncertainty of all that’s shaping lumber markets these days, today recall Forest Economic Advisors (FEA) analyst Paul Jannke’s presentation at the LMC Expo in Philadelphia back in November. Toward the end of his decidedly bearish forecast for 2016, Jannke described home sales data as the key stat to watch when gauging future homebuilding activity. Today, we learned U.S. single-family home sales surged almost 11% in December. According to CNBC, it’s “the latest indication that the housing sector remains on firmer footing despite a massive stock market sell-off and slowing economic growth.”
On December 30, 2014 we asked Will $55 oil help or hinder housing starts next year? The answer may not be entirely clear on this as year-end activity in the U.S. in particular finds lumber market activity brisk with upbeat November housing reports. Builders are reportedly stepping up home construction broadly across the U.S., suggesting the housing market will help anchor the economy amid global turbulence and projected four more interest rate hikes next year. So far the winter weather that has known to shut down building, in the lead-up to Christmas in past seasons, has not played a large part. Builders broke ground on 1.173 million units, when calculated at a yearly rate, in November, up 10.5% from a month earlier, the Commerce Department said Wednesday. Construction climbed at roughly the same pace in the first 11 months of the year compared with the same period in 2014.
My takeaways from industry connections at the lively LMC Expo in Philadelphia last week suggest year end reviews from analysts point to a mixed outlook for 2016.
Analyst Paul Jannke, Principal of Forest Economic Advisors (FEA) presented at Friday’s breakfast session. I arrived early, having heard Jannke speak back in 2012 at the NAWLA Regional Meeting in Vancouver. A bull in a Bruins jersey back then (see post here), his presentation was decidedly more bearish on Friday. The four factors explaining this year’s lumber price collapse were familiar (lower than forecast U.S. housing starts, lower export volumes to China, rising production capacity, foreign exchange rates). Of greater interest were the reasons why FEA projects that “markets will likely remain weak through next year”:
- Mills are anticipating higher levels of consumption (“investing in efficiency”)
- U.S. dollar to remain strong
- Domestic consumption growth will be slow
- Exports to China will continue to be weak
- Entering a period of seasonal weakness
- Expiration of the SLA.
At the same time, Jannke cited a number of reasons suggesting minimal downside risk (“the longer the time horizon the better we feel”):
- Near cost of production for Western SPF
- Dealer inventories are low
- Limits to Russia’s ability to supply China
- Consumption will increase
- BC will see supply limitations
- Mills will be more cautious with their planning.
When gauging homebuilding activity (FEA forecasts 1.26 million U.S. housing starts in 2016), Jannke said that sales data is the key stat to watch going forward (“new home sales are presently consistent with just over one million starts”).
Later that morning, I appreciated the opportunity to speak with Jannke at our Dakeryn table on the exhibit floor. It was interesting to hear him say that lumber market conditions might play a role in the timing of any cross-border trade negotiations (“to help in proving injury”). When I asked how Canadian sawmill expansion in the Southeastern U.S. might play into those negotiations, Jannke downplayed the impact while noting that members of the U.S. Coalition for Fair Lumber Imports include a number of private timber owners. I also asked how so many forest analysts “got it wrong” in their 2015 forecasts for significantly higher lumber prices. Jannke said that while he couldn’t speak for other analysts, FEA had one of the more tempered price forecasts this year ($300-320/M).
The news this week is all about getting burned. In B.C. we’re told that forests ravaged by fire this year are already nearly triple the 10-year average, with costs of fighting them expected to soar to $400 million. With newly-imposed water restrictions, Vancouver lawns display shades of burned brown. On normally lush Fraser Valley farms, the hot weather is scorching crops, leaving one visiting trucker to off-load surplus blueberries on our trading floor this week. Somehow the perceived hardships resulting from rules against washing your car in Vancouver pale in relation to wildfires causing families to be burned out of Interior homes.
There are other reports of getting burned in the news today. The summer sun has reportedly brought out a new trend where Darwin award candidates are using sunscreen to draw designs on their bodies. The bright idea is to get a severe sunburn so that the design created by the sun is visible. Meanwhile gold investors’ portfolios are getting burned rather than burnished. And there are other burning issues today besides Canadian lumber stocks. Today’s column by Barbara Yaffe in The Vancouver Sun reports that homebuyers risk getting burned by home inspections because there is a lack of independence between the home inspection industry and realtors. Do the bulldozers really care?
In the wider world there is more talk around the nuclear deal with Iran as Congress prepares to debate the issue over whether it’s a good deal or a bad deal in which some suggest the West and Israel will surely “get burned”. This week came news of hackers accessing a website teed up to facilitate philanderers. Playing in those websites is said to hold risks of getting burned. Some might say this alludes to the kind of burning ring of fire that Johnny Cash used to sing about.
Some might question just what does all this have to do with the price of 2×4’s? But in conclusion, a lumber trader was heard to say that even amid reports Americans bought homes in June at the fastest rate in over eight years, there is risk of getting burned in the cumulative build-up of excessive household debt in Canada. But for some lumber traders, it was Starbucks recall of tea pitchers that really caught our eye, after some customers were cut and burned by breaking/leaking glass. We depend on that stop each morning to offer up encouragement for the day – to be rendered risk-free of getting burned – if you don’t count the price paid in depleted loonies.