Spend Matters welcomes this guest post from Verity Michie, data analyst at Mintec.
Wood has been used for generations to build houses in North America and is still the material of choice for Americans when it comes to building their homes. Plentiful supply and the ease of working the material is what makes wood so popular. Processed wood or lumber mainly comes from two types of trees: softwood and hardwood. Housing construction accounts for nearly half of the U.S. softwood demand.
So, how do we measure the housing and construction industry demand and the effects this has on the lumber market? This is done using housing starts statistics. Housing starts are a reflection of the number of housing unit construction projects that have begun in a given period. Not only is this a good indicator of the strength of an economy, but in a strong economy demand for new houses will increase and vice versa, it is also a good indicator of lumber prices, as the housing and construction industry accounts for 40% of U.S. lumber demand.
Since 2013, U.S. lumber prices have been on an overall downward trend. The weakening of the euro against the dollar throughout 2014 caused reduced demand for U.S. lumber, as prices became more expensive for European buyers. More recently, reduced demand from China, where the housing and construction industries have tightened following slower economic growth, added further downward pressure to the prices, leading to a five-year low in September 2015.
More recently, however, things seem to be looking up for lumber producers. As we mentioned in our previous article 'U.S. Lumber Revival After a 5-Year Low?', published in January this year, the housing market has seen a recovery to levels prior to the 2007 financial crash.
Lumber prices in the U.S. are on an overall upward trend for the first time since H2 2013. Prices have increased 32% since the beginning of the year, reaching highs last seen in December 2014. The situation has been helped by increased demand from the housing and construction sectors.
U.S. housing starts increased 4.8% month-over-month in June to reach a four-month high, as well as reaching the highest monthly stat since 2007. Single-family housing starts, the largest section of housing starts, grew by 4.4% month-over-month in June. The future is also looking bright, with building permits up 1.5% month-over-month, indicating an increase in the number of housing unit constructions authorized to be built in the near future, while the 12-month rolling average shows single- and multi-family housing starts up 9.5% year-over-year in May. Housing starts are estimated to grow by 15% year-over-year in 2016.
However, there is an element of uncertainty on the horizon. The U.S. and Canada still have an outstanding need to renegotiate the Softwood Lumber Agreement (SLA), which expired in October last year. They are in a 12-month grace period for now, but this will end in October 2016 and may lead to potential litigation or trade disputes between the two neighbors. Hopefully the industries will be able to set aside their differences and put a new agreement in place in time. However, we may well be revisiting this topic come fall.