Forisk Forecast: US Housing Starts Outlook

20 02 2013

This is the second in a series related to Forisk’s 2013 forecast of softwood stumpage prices in the United States.

Herman Chapman, in his 1935 book Forest Finance, wrote:

Forestry is an empirical art and not a mathematical science.  The two major premises upon which it rests, namely, human needs expressed in consumption of forest products, and the vital forces of tree life in their reaction to the composite factors of site including climate and soil, can be measured and predicted with only approximate accuracy. 

In this quote, I hear lessons echoed by friends and colleagues in the forest and timberland industries who remind us to maintain perspective and prioritize the most important factors.  Timberland investment pioneer Forrest Kellogg teaches, “It’s all about the soil!”  Timber buyer and procurement forester Fred Voyles reminds us, “You’re not doing your job if you stay in the truck!” Even professional gambler Amarillo Slim – neither friend nor colleague – advised, “You can shear a sheep a hundred times, but you can skin it only once.”

While I might not talk to Slim when it comes to future prices – or anything related to money, unless I want to lose some – we acknowledge that timber forecasts depend on appraisals of the future that we develop with “approximate accuracy.”  In this process, we do the best can to account for the strengths and weaknesses of the data available and the objectives across participants in forest industry markets.

From the macroeconomic perspective, housing starts critically affect timber forecasts.   Increased home building leads to periods of strengthening stumpage prices through growing demand for lumber and other building products.  The buying and building of new homes also fuels spending on wood products such as cabinets, furniture and hardwood floors.   Ultimately, however, our primary interest is the movement of stumpage prices in each local market as it plays out its role in satisfying national and export markets for forest products and wood bioenergy.

Every six months, Forisk builds a composite housing starts outlook based on publicly-available, independent forecasts from professionals in the housing industry.  These include Fannie Mae, Freddie Mac, Mesirow Financial and the National Association of Home Builders (NAHB), as well as long-term assumptions from the Energy Information Administration’s (EIA) model of the US economy (Figure 1).

20130220 Forisk Forecast_Housing

Our 2013 Base Case peaks at 1.75 million housing starts in 2018.  For comparison, our Mid-Year 2012 Base Case peaked at 1.78 million housing starts in 2017.  Overall, housing has recovered a bit quicker than forecasted in 2012 with the expectation of a slightly flatter, long-term trend.  In this Composite Outlook, the primary source of sensitivity with respect to lumber demand is the assumed single-to-multi-family housing mix.

To learn more about the 2013 Forisk Forecast or Forisk’s market-specific stumpage forecasts tailored to individual wood-using facilities or timberland ownerships, contact Brooks Mendell at, 770.725.8447. 


Timber REITs: Weyerhaeuser Timber Segment Positioned to Outperform South-wide Average

16 05 2011

Two-thirds of the nearly 6.2 million acres that Weyerhaeuser (WY) owns and leases in the United States are located in the South.  Our Equity Research team matched WY’s timberland acres to Forisk’s state-by-state forecast of stumpage prices and wood demand to assess the revenue growth potential for the next five years from WY’s timber operations in the US South.

Forisk forecasts state-specific pine sawtimber and pulpwood prices in the South for eleven states.  These forecasts use statistical models that establish relationships between stumpage prices and the state-specific demand for timber relative to other states.  These relationships allow each state to individually “express” its price relationship to changes in, for example, sawtimber demand (driven primarily by the housing markets) over time.

According to our models, the top five states in the US South in terms of demand growth for 2011 are Mississippi, Louisiana, Alabama, Tennessee and Arkansas. Approximately three million acres, or 74% of WY’s southern timberlands, are located in four out of five of these high growth markets.  Since these markets are expected to outperform the other Southern states with respect to demand growth, this positions WY’s timber business to outperform the South-wide average assuming any strengthening in housing and lumber markets.

During the housing downturn, WY deferred its harvest substantially and plans to increase harvest by approximately 10% this year and 70% from the current levels over the next 10 years.

Potential Impacts on Timberland Investors from FDIC Proposals on Risk Retention and Mortgage Markets

14 04 2011

Recent comments by Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Blair regarding minimum down-payments of up to 20% for “qualified residential mortgages” (QRM) echoed discussions about residential housing markets at the UGA Timberland Investment Conference.  Our Equity Research Team (Neena Mishra, CFA, Director of Equity Research; Dr. Tim Sydor, Forest Economist; and Dr. Brooks Mendell) met to discuss potential issues and implications from this on housing and stumpage (timber) markets:

According to National Association of Homebuilders (NAHB) Chairman Bob Nielsen, the plan would disqualify a number of potential home buyers, reducing home sales and resulting in 50,000 fewer housing starts per year.  Changes in mortgage requirements affect housing starts, which in turn affect the forest products industry.

How might this affect timberland investors?  Using Forisk’s interactive Stumpage Forecasting models, we applied NAHB’s numbers.  The net impact of fewer home  built reduces softwood lumber consumption by 1.5 to 1.9 billion board feet per year which could lower softwood sawtimber stumpage prices in the US South by $0.60-0.80 per ton based on direct effects alone.  This does not include potential impacts on the shadow inventory of unsold homes and potential foreclosures in the pipeline.

In addition to affecting timber markets, the FDIC/Federal Reserve plan represents a significant shift in risk.  From one perspective, any probability of default whether due to job loss or equity loss (so-called “strategic default”) is borne by the buyer in the form of the 20% down-payment. As written the requirement is indiscriminate, even including buyers with high FICO scores.  Would rates actually decline as a result?

Requiring lenders to have “some skin in the game” is necessary but risk retention increases the cost of credit.  Thus a line must be drawn to determine which loans are less risky and the less risky loans should carry lower rates of interest (possible only if no/very low risk retention by the banks).  There is no doubt that QRM loans will carry a much better rate of interest, if the rules are imposed.  Overall rates may or may not come down but QRM loans would clearly carry much better rates than non-QRM loans.

The picture is further clouded by the fact that the private securitization market for housing is gasping; securitization brings down the cost of credit and increases the availability of credit. Reviving the private securitization market would be difficult if very strict risk retention requirements are imposed.  This is further exacerbated because current rules exempt FHA, Freddie Mac and Fannie Mae loans (while Freddie and Fannie remain in conservatorship) from any risk retention requirement. Currently about 90% of the loans are backed by these agencies, so the actual impact on the housing markets may not be that great.  As such, the rules actually favor Freddie-Fannie, making their exit – an oft cited objective of reforming the mortgage markets and reducing tax-payer exposure – from the housing markets anytime soon nearly impossible.