Pessimistic picture is expected to be short-lived
Forecasts from the United States-based Forest Economic Advisers, LLC present a dark image for North American housing and, consequently, lumber markets during the coming year. Increasing interest and mortgage rates will most certainly hinder economic activity in 2023. (FEA).
This is anticipated to end quickly, though, as FEA, the leading source for analysis and information on North American wood products, anticipates economic growth the next year.
Given that the majority of homes in North America are made of wood, home development has a direct impact on lumber demand, along with mortgage rates and purchasing power.
Due to a wave of recent rate increases, FEA predicts that U.S. housing starts would decline by 16% annually to 1.3 million in 2023 before increasing to 1.55 million in 2024 as the overall economy is anticipated to strengthen.
Comparing with pre-and-during-pandemic levels
The strong fundamentals that contributed to the surge in demand during the pandemic (when rock-bottom interest rates sent home buyers into a buying frenzy and caused prices to soar) are still simmering below, including record pent-up demand, a sizable population of adults in prime home-buying years, record home equity, an aging housing stock, and historically low inventories of homes for sale.
With these factors supporting the main end-use market for softwood lumber, house starts will stay above pre-pandemic levels.
According to FEA’s predictions, all end-use markets for lumber, with the exception of industrial output, will experience a temporary decline in 2023, which will be followed by a return to market growth in 2024.
Nonetheless, it is anticipated that residential repair and renovation (R&R) may take longer to recover. To give you an idea, R&R spending increased by over 4% in 2021 and by an expected 19% in 2022, but according to the FEA, it will decline by 21% in 2023. (Chart 1).
The amount of money that consumers are anticipated to spend on home upgrades will still be substantial by historical standards. This is caused by increasing home equity, a shortage of new-entry-level and first-move-up homes brought on by growing housing costs, and an aging housing stock.
Also, it is expected that American homeowners who purchased their homes during the pandemic, when rates were low, stay in them in order to maintain their cheap mortgage rates. These elements ought to persuade homeowners to decide to renovate or expand their current homes rather than sell them and move into more expensive ones.
U.S. housing sector outlook
The FEA predicts that US home renovation spending will decline by 21% annually to US$163.8 billion in 2023, which is still much higher than the US$149.5 billion average of the second half of the 2010s. In 2024, this is projected to fall even more, to US$161.0 billion.
On the other side, a decline in U.S. industrial production is anticipated in the first half of 2023 as a result of rising interest rates and a slowing U.S. economy, before it resumes an upward trend.
This is because the ISM Purchasing Managers’ Index, a sector-leading indicator, has been strong for more than two years and suggests that industrial production will probably continue to rise in the near future. Moreover, there is a need to replenish low stockpiles of manufactured items.
Finally, FEA anticipates that reshoring of manufacturing will help to boost industrial production as North American businesses deal with supply-chain disruptions and the evolving geopolitical environment.
Demand – supply picture of the industry and projections
Due to weakening end-use markets and the continued likelihood of a recession, the overall demand for softwood lumber in North America will decline by 8.3% to a nine-year low in 2023 after falling by 1.6% in 2022. This will pass quickly, though, since a 7.5% increase to 62.5 BBF is predicted for 2024.
The United States’ consumption fuels the demand for North American softwood lumber. Consumption in the United States rose to a 15-year high in 2021 while prices surged to historic highs. According to the FEA, as end-use market activity declines, U.S. lumber consumption will fall by 9.1% more in 2023 from its 2022 level. The U.S. Federal Reserve increased interest rates in an effort to cool the overheating economy, and this is in response.
Additionally, the weak demand for office and retail space is a hindrance to non-residential sectors. But as those markets expand in 2024, so will American consumers’ need for lumber. The FEA predicts growth of 8.7% to 52.14 BBF by 2023.
Global trading situations of lumber
North American exports to other countries fell as a result of the recent price hikes. This is mostly due to the fact that shipments to China are anticipated to continue declining in 2022–2023. The demand for lumber produced in North America will decline as a result of sanctions placed on Russia as a result of its invasion of Ukraine.
The cost of shipping southern yellow pine and SPF timber to China has significantly increased as a result of the country’s recent quarantine restrictions on imports of pine lumber from North America. Last but not least, robust domestic demand and relatively high pricing will further restrict North American exports to China.
As a result, after a sharp decline of 23% in 2022, North American offshore exports will decline by 7.9% in 2023. With the assumption that China will loosen its limitations on North American pine, we anticipate an increase in offshore exports of 11%.
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