Lumber, log and housing markets

Here is the outlook for log, lumber and housing prices from the November 2011 DNR Economic and Revenue Forecast – a quarterly publication:

Lumber and log prices

Figure 2.8 shows monthly real seasonally adjusted prices for lumber and logs (the price paid for logs delivered to the mill). The lumber price bottomed at $159/mbf in February and March of 2009 and rose to highs of $313/mbf in April 2010 and $304/mbf in January 2011. In July 2011, the lumber price stood at $257/mbf. Composite log prices have shown less volatility, as they usually do, rising from a low of $291/mbf (seasonally adjusted average) in April and May of 2009 to a high of $501/mbf in April 2011. The October price for logs is at $463/mbf.

Earlier in 2011, dropping lumber prices brought the price curves for logs and lumber together, placing mills in a pinch as their margins disappeared. Some mills announced temporary and/or partial shutdowns because log prices were too high relative to lumber prices. Since May, lumber prices have increased relative to log prices, a good sign for mills but this relationship may not continue if lumber prices fall back as expected.

Housing market: Existing homes

Prices of existing homes in the United States have generally been moving sideways the last two and one-half years after having dropped back to mid-2003 levels in the beginning of 2009. The Case-Shiller existing home price index, a composite for 20 large U.S. cities, hit a new post-2003 low in the first quarter of 2011, when the average existing house was worth only 68 percent of what it was worth at the peak of the real estate bubble in the First Quarter of 2006. On an annual basis, home prices were down in 18 of 20 cities when compared with August 2010. Most economists do not expect housing prices to begin increasing again at least until the end of 2012; others think it will be much longer.

An excess supply of existing homes is weighing on the housing market and contributing to lower home prices and a depressed level of new home construction. Making things worse is the huge “shadow inventory” of foreclosed properties and future foreclosures in the pipeline (distressed properties that haven’t yet hit the market), estimated to be in the range of 3.5 million to 4 million units.

Housing market: New homes

New home sales continue to be at historically low levels, averaging only 300,000 per year over the last five quarters. This rate of new home sales is only 43 percent of the long-term (1963-2010) “normal” annual rate of 680,000 per year. In the 12 months ending September 2011, only 265,000 new homes were constructed for sale. This is only 19 percent of the new homes which were built in the peak year of 2005.

The dramatic drop in new house construction has brought the inventory of newly built homes down to its lowest level in 10 years. At a high in July 2006, there were 572,000 new single family homes available to purchase in the United States. At the end of September 2011, there were only 165,000 available.

The months’ worth of inventory of new homes for sale has worked its way down to 6.2 months in September from a monthly high of 12.2 months in January 2009. This compares with the pre-2006 “normal” of about four months’ worth of inventory of new homes. New home completions and sales won’t increase significantly until the excess supply of existing homes, including those in the foreclosure pipeline, is absorbed.