Whatever Happened to the Recovery in Southern Pine Sawtimber Stumpage Prices?

When a year draws to a close, it is customary to look back and take stock of what has transpired. If that is done with U.S. Southwide pine sawtimber (i.e., DBH ≥ 12.0 inches) stumpage prices, someone might legitimately wonder if an economic recovery has ever really arrived. Between August 2011 and November 2015, stumpage prices have increased by 10.5% on a trend-line basis; that corresponds to a compound annual growth rate (CAGR) of 2.5%. Yet, the 2015 year-to-date (through November) average of total U.S. housing starts (1.102 million units SAAR) is over 130% higher than the April 2009 low point (478,000 units). In addition, the trended CAGR of Random Lengths' southern yellow pine lumber composite price is up 7.7% since January 2009. So, why has the post-Great Recession stumpage price increase been so muted?

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One reason is the Canadian dollar (CAD). A weaker CAD encourages Canadian lumber exports to the United States, in the process capturing market share from U.S. solid wood manufacturers and -- in turn -- reducing demand for U.S. softwood sawtimber. U.S. imports of Canadian softwood lumber have risen at a trend CAGR of 8.3% since January 2009. 

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In the chart below, we divided total U.S. housing starts by the CAD/USD exchange rate (HS/CAD) to suggest the degree to which the exchange rate affects perceptions that U.S. solid wood manufacturers have regarding housing starts. For those producers the “HS/CAD” line is a more realistic portrayal of domestic lumber demand derived from housing starts than the reported “TotalHS” line. Thus, while total reported housing starts have increased at a trend CAGR of 14.4% since April 2009, HS/CAD have risen by only 11.0% -- a difference of nearly one-quarter. The increase in Canadian softwood lumber imports has largely kept pace with the CAD-adjusted rise in U.S. housing demand.

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A second reason is that, although total housing starts have been rising, the share of total starts claimed by multi-family structures -- which, on average, use roughly one-third the volume of softwood lumber per start compared to single-family homes -- has been expanding (from an annual average of 19.5% in 2010 to 35.8% YTD through November 2015). That larger share of multi-family units also helps explain why total housing starts were up 81% on an annual basis between 2009 and 2014, but U.S. lumber production rose by only 34% (+37% for Southern production) during the same period.

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Another reason is that tree growth continues to outpace the volume harvested. With more supply "on the stump" -- particularly in pine sawtimber, as shown in the following table -- price pressure is reduced.

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This situation has been further exacerbated by the Great Recession’s impact on installed sawmill manufacturing capacity. As noted above, southern lumber prices have increased at a trend CAGR of nearly 8% since January 2009; this is because -- and despite a muted recovery in lumber demand -- roughly 20% of U.S. solid wood capacity (the losses for lumber were even greater) was shuttered as a result of the industrial downturn experienced during/since the Great Recession. Thus, there was insufficient capacity to meet even the comparatively anemic increase in demand as the recovery occurred, prompting lumber prices to rise and capacity utilization rates to climb. That explains the lumber price response, but what about stumpage prices? 

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The loss of manufacturing capacity hindered the sector’s ability to expand lumber supply in response to rising consumer market demand. It also reduced localized geographic demand for stumpage -- both in terms of the quantity of stumpage demanded and the number of mills competing for that stumpage. Coupling the stumpage market situation of fewer mills and lower localized demand with increasing log supply “on the stump” explains why the stumpage price recovery has been muted despite steady trend improvement in lumber prices since 2009.

Taking all of these influences together, and given our expectations of how present trends are likely to “play out,” we see little reason to believe a dramatic change may be coming over the horizon.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

Whither Home Prices?

With June’s median existing home price rising to a record-high $236,400 and the median new-home price at $281,900 (just $20,900 off the November 2014 record of $302,700), what direction are home prices likely to take going forward? To hazard a guess we used a metric -- inspired by an Agora Financial 5 Min. Forecast published on 23 July -- wherein median home price (MP) is divided by median household income (MHI) to derive a price/income multiple (PIM).

Each month the U.S. Census Bureau reports the median price of new homes sold; likewise, the National Association of Realtors (NAR) reports the median price of existing homes sold. The Census Bureau reports median household income on only an annual basis, however, and the latest data is for 2013. We first converted the monthly median new and existing home prices to annual observations by calculating averages for each year (the green and purple lines, respectively, in the first graph below). To estimate median household income for 2014 and 2015, we developed an ordinary least squares regression equation (R² = 0.91) wherein the Census Bureau’s MHI is a function of NAR’s annualized MHI (reported as part of NAR’s housing affordability index data series). The derived MHI estimates are shown as the red segment of the income line in the first graph below.

Several items are noteworthy: Growth in MHI broke off its long-term trend in the wake of the Great Recession (i.e., since 2007) and -- although having regained its pre-recession level in 2012 -- has yet to fully recover its former trajectory. New-home MPs peaked in 2007, bottomed in 2009, essentially regained their pre-recession level by 2012, and have continued higher since then. Existing-home MPs, by contrast, peaked in 2006, bottomed in 2011, and have yet to regain their pre-recession level.

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The Census Bureau’s median home price data extends back to 1984 whereas NAR’s data begins in 2003. For the available years, we divided annualized median home price by annualized median household income to estimate new and existing home price/income multiples. Prices and PIMs are shown in the second graph below. PIMs for new homes have ranged from 3.57 to 5.34, for an average of 4.31; existing-home PIMs have ranged from 3.29 to 4.71, for an average of 3.86. I.e., on average new home prices have been equivalent to 4.31 times MHI, and existing home prices 3.86 times MHI.

For new homes, the PIM peaked at 5.06 in 2005 -- the height of the housing boom. It slid to its low point of 4.31 by 2009 and has since trended to an all-time high of 5.34 in 2015. For existing homes, the PIM peaked at 4.71 in 2005 (despite the MP peaking in 2006), but two additional years were required to hit the bottom of 3.29 (in 2011); as with its corresponding MP, the existing-home PIM has not yet returned to its pre-recession high.

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Particularly in light of the new-home PIM presently at an estimated all-time high and incomes posting only slow growth compared to home prices (especially on an inflation-adjusted basis), we think there is greater downside than upside risk to home prices. The table below shows the implications for prices if the PIMs return to selected historical levels.

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For new homes, the best scenario shown involves the PIM returning to its 2005 level; that would result in a price reversion to $273,334 -- a decline of $15,590. A more dire scenario would have the current PIM retreating by an amount equivalent to that seen between the 2005 peak and 2009 trough; in that case, the PIM would drop to 4.60 with the new-home MP falling to $248,576 (a decline of $40,358).

Because the existing-home PIM has not returned to its pre-recession peak, there is perhaps more upside potential. For example, were that PIM to once again hit the 2005 peak, the existing-home MP could increase by $38,922 to $254,622. The most pessimistic scenario involves the existing-home PIM retreating from its current level by the amount seen between 2005 and 2011; in that case the multiple would slump to 2.57, resulting in the existing-home MP dropping by $76,888 to $138,812.

For housing starts (new homes) and sales (existing homes) to continue climbing higher, we believe it will be necessary for home prices -- particularly new home prices -- to fall so coherence is maintained with households' ability to pay (i.e., MHI). Until that occurs we believe it will be difficult for housing starts to make more substantial progress toward regaining the long-term average level of 1.5 million units per year.

Unfortunately, as the table above shows, home-price reductions will choke off the ability of some current homeowners to refinance or trade up/down, thereby reducing access to potential home equity that might provide additional economic stimulus. On balance, however, lower home prices would likely provide the greater economic boon because the Echo Boom demographic cohort would be able to flex more economic muscle through greater household formations. Regardless, the path forward in housing’s march back toward “normal” is likely to encounter several twists and turns. There will be a variety of counterbalancing impacts to the general economy in the process that, on net, could prove positive.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.