Category Archives: Finance & Economics

High interest rates continued to batter the housing market in May as both single and multifamily starts continued their slide from April. Overall housing starts dropped 5.5% from the month prior as noted by the U.S Census Bureau. Single family numbers specifically dropped 5.2% to a seasonally adjusted annual rate of 982,000 units, below April’s adjusted rate of 1.036 million units. This is still up 18.8% compared to May of last year. Multifamily starts, meanwhile, have declined another 6.6% from April to 295,000. This, notes the NAHB in its press release, is the lowest rate for MDU construction since April 2020, nearing the height of the pandemic. At the time of writing, lumber prices currently sit below pre-pandemic prices, despite post-pandemic inflation. During this time, the average rate on the 30-year fixed mortgage has danced between over and under 7%.

Anyone who follows the lumber industry closely knows it’s not for the faint of heart. Market volatility, which is frequently inflamed by any number of economic, environmental, political or logistical fluctuations, can make lumber pricing seem like an unpredictable flume ride. Practically speaking, it makes buying and selling a tricky proposition. So, what’s the latest on this roller coaster of a market? We sought guidance from industry veterans Russ Kathrein, VP of lumber and building materials for Do it Best, as well as Tim Johnson, VP of forestry products at LBM Advantage. Below are their thoughts on which way the wood winds are blowing.

Investments from a position of strength will enable Home Depot and Lowe’s to capitalize on a rebound in-home improvement spending that we think will emerge in 2025, with sales rising mid-single digits. While both retailers stand to benefit, Home Depot’s outsized exposure to pros could fuel stronger growth amid expectations for the segment to outpace DIY customers. …The $1 trillion North America home-improvement industry may return to growth in 2025, climbing mid-single digits after two years of declines. Our intermediate-term view is underpinned by a rebound in existing home sales from trough levels, $32 trillion in homeowners’ equity and the oldest US housing stock on record. The $500 billion market for pro contractors is projected to fuel industry growth over the next five years, climbing 4.4% annually vs. 3% for the DIY segment.

Data released on Friday shows that housing starts and building permits have dropped to their lowest levels since mid-2020, and lumber prices are responding. …As of yesterday’s close, lumber is down 9.7% over the last month and down 15% since this time last year. Permit issuance dropped 3.8% last month to an annualized pace of 1.38 million, down from 1.44 million in April. Everyone is getting housing wrong now. The interest rate lags are beginning to hit, and housing construction is clearly telling you the impacts are just starting to manifest. …The data isn’t good, which matters for U.S. markets. Lumber is likely to continue its downtrend in response; it is one of the most expensive materials used in a new home, and homebuilder sentiment has a big impact on lumber’s prices. As homebuilding permits and housing starts slump, lumber demand slacks and prices fall — just as we are seeing today.

The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.5 percent in May 2024 to 101.2 (2016=100), following a 0.6 percent decline in April. Over the six-month period between November 2023 and May 2024, the LEI fell by 2.0 percent—a smaller decrease than its 3.4 percent contraction over the previous six months. “The U.S. LEI fell again in May, driven primarily by a decline in new orders, weak consumer sentiment about future business conditions, and lower building permits,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “While the Index’s six-month growth rate remained firmly negative, the LEI doesn’t currently signal a recession. We project real GDP growth will slow further to under 1 percent (annualized) over Q2 and Q3 2024, as elevated inflation and high interest rates continue to weigh on consumer spending.”

Single-family and multifamily housing starts fell in May as high interest rates for construction and development loans and elevated mortgage rates held back both housing supply and demand. Overall housing starts fell 5.5% in May to a seasonally adjusted annual rate of 1.28 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. …Within this overall number, single-family starts decreased 5.2% to a 982,000 seasonally adjusted annual rate. However, on a year-to-date basis, single-family starts are up 18.8%, albeit off weak early 2023 data. …The multifamily sector, which includes apartment buildings and condos, declined 6.6% to an annualized 295,000 pace. This is the lowest pace for apartment construction since April 2020. The three-month moving average for multifamily starts is the lowest since the fall of 2013 as the multifamily development deceleration continues.

Housing prices in America today are near an all-time high, and home ownership has yet to recover from the 2008 and 2020 recessions. …With construction materials making up roughly 60% of a home’s cost, we need to address the problem from another angle. The U.S. currently has tariffs on important construction materials such as Canadian lumber and Chinese nails and pipes. Eliminating such building material tariffs could deliver a powerful blow to the other side of this housing problem. Unfortunately, President Biden has other plans. This May, the president announced a new 25% duty rate on Chinese steel, up from 0-7.5%. For comparison, the 5-20% duty rates on Canadian softwood lumber added an extra $24,000 to construction costs in 2021. Construction costs have skyrocketed since 2020, increasing by an average of 20% and outpacing even the highest inflation rate of 8%. Imposing still more tariffs on important construction materials will only further inflate those costs.

Mortgage rates that continue to hover in the 7% range along with elevated construction financing costs continue to put a damper on builder sentiment. Builder confidence in the market for newly built single-family homes was 43 in June, down two points from May, according to the NAHB/Wells Fargo Housing Market Index (HMI). This is the lowest reading since December 2023. …The economy, and monetary policy more directly, is in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%. …All three HMI component indices posted declines in June. The HMI index charting current sales conditions in June fell three points to 48, the component measuring sales expectations in the next six months fell four points to 47 and the gauge charting traffic of prospective buyers declined two points to 28.

A report released by the Commerce Department on Thursday unexpectedly showed a steep drop in new residential construction in the U.S. in the month of May. The Commerce Department said housing starts plunged by 5.5% to an annual rate of 1.277 million in May after surging by 4.1% to a revised rate of 1.352 million in April. Economists had expected housing starts to climb by 0.7%. With the unexpected decrease, housing starts fell to their lowest level since hitting an annual rate of 1.254 million in June 2020. Single-family housing starts dove by 5.2% to an annual rate of 982,000, while multi-family housing starts plummeted by 6.7% to an annual rate of 295,000. …The report also said building permits slumped by 3.8% to an annual rate of 1.386 million in May after tumbling by 3.0% to a rate of 1.440 million in April.

To the extent areas of increased climate risk may be reflected in pockets of repriced real estate in the US, those pockets have the potential to infect other areas of our financial system. After all, it was foreclosures in Las Vegas, Phoenix, and a handful of other locations that led to a cascade of global effects in 2008. …If we wanted to steadily, prudently reduce risks to homeowners in America that are being caused by out-of-date building codes, inadequate land-use policies, and under-capitalized insurers, one possible area to examine would be the rules that Fannie Mae and Freddie Mac use to screen the mortgages they agree to guarantee. Using this power wisely has the potential to affect much of the housing market, because these Government Sponsored Enterprises support about 70 percent of the mortgage market, according to the National Association of Realtors.

Inputs to residential construction, goods less food and energy, fell 0.09% over the month according to the most recent producer price index (PPI) report published by the U.S. Bureau of Labor Statistics. …This was the first decrease in the index since October of last year. While the index fell over the month, it was 2.91% higher than May of last year. …The seasonally adjusted PPI for softwood lumber fell for the first time since February, down 5% over the month. Prices for softwood lumber remain lower than last year at 8.10% below May of 2023. …The non-seasonally adjusted PPI for gypsum building materials was unchanged over the month but was up 2.09% over the year. …The seasonally adjusted PPI for ready-mix concrete fell for the second consecutive month, down 0.13% in May after falling from 0.9% in April. …The non-seasonally adjusted PPI for steel mill products rose 0.54% in May after falling in the two previous months. 

Lumber prices rebounded toward $500 per thousand board feet, moving away from the eight-month low of $488 observed from June 4th as the latest US data lifted the demand outlook. Softer-than-expected US inflation data, which bolstered expectations for multiple Federal Reserve rate cuts this year, added further optimism for reduced mortgage rates amid a sharp decline in US Treasury yields. Still, housing starts continued to struggle amid high rates and home prices continue to weigh on home builders. Mortgage rates remained above 7% for over two months, while building permits in the US sank for a second straight month in April, limiting the outlook for wood and housing construction materials.

The Federal Reserve’s monetary policy committee held constant the federal funds rate at a top target of 5.5% at the conclusion of its June meeting. …Compared to the Fed’s May statement, the current statement upgraded “lack of progress” stated in May to “modest further progress” referred to this month with respect to achieving the central bank’s 2% inflation target. The FOMC’s statement also noted (consistent with its commentary in May): The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.  Overall, the central bank continues to look for sustained, lower inflation readings, with the data having shown insufficient progress during the first quarter. The May CPI data was a step in the right direction, but the central bank will remain data dependent with respect to an eventual easing of monetary policy.

A closely-watched report on US inflation showed consumer price increases cooled during the month of May, according to the latest data from the Bureau of Labor Statistics released Wednesday morning. The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% over the prior year in May — a deceleration from April’s 0.3% month-over-month increase and 3.4% annual gain in prices. Both measures came in lower than economist expectations. It was the lowest monthly headline reading since July 2022. A decline in energy prices, led by a drop in gas prices, contributed to further downward pressure on headline CPI. …”The CPI release for May is very good news for the Federal Reserve and it is going to be even better news for the PCE price index, which will be released at the end of the month,” Raymond James’ Chief Economist Eugenio Aleman said.

Skanska – a Sweden-based global construction and development company – published its Market Trends Report, which revealed three important topics permeating today’s industry. …1. All eyes on Baltimore’s Key Bridge and supply chain—While initial suggestions after the tragedy were that the clean-up and rebuilding process could cause severe issues to the construction supply chain, Cantando said time and investigation has revealed that disruptions should be limited in the build sector. …2. Construction material prices are up—Concrete prices rose throughout 2023 and into 2024 – about 20%. Metal prices continued to inflate, particularly copper. Aluminium is up 16%. Zinc is up 20%. Copper is up 34%. 3. Mass timber is working out efficiency kinks—While the emerging resource of mass timber has excited some and rattled others in the construction industry, Skanska’s panel offered a pragmatic view of the industry, as US states have increasingly codified the material use in recent years and record-breaking high-rises are entering city skylines.

The recession in the U.S. market for existing homes has been so deep that April sales were back to late-’70s levels. …The reason, of course, is that housing affordability has deteriorated so much that many buyers and sellers alike have pulled back from the market. Many homeowners are staying put rather than trading in their 3% mortgage rate for a 7% mortgage rate. …Goldman Sachs projects that existing home sales will slowly drift up from 4.1 million in 2024 to 4.5 million in 2027. Not only is that far below the 6.1 million during the height of the pandemic housing boom in 2021, it’s also well below the 5.3 million U.S. existing home sales during “normal” times in 2019. ….Goldman Sachs predicts the average 30-year fixed mortgage rate will fall to 6.5% by the end of 2024, and to 6.3% by the end of 2025. And analysts at the investment bank forecast that U.S. home prices will rise 3.8% in 2024, followed by 4.4% in 2025.

The Random Lengths framing lumber composite price rose 1.6% from the previous week. This was the fourth consecutive week of increases. …Softwood lumber prices have been especially volatile in recent years largely because of increased demand, rising tariffs, supply-chain bottlenecks and insufficient domestic production. …In addition to narrowly defined framing lumber, products such as plywood, OSB, particleboard, fiberboard, shakes and shingles make up a considerable portion of the total materials (and cost) of a new home. Surveys conducted by Home Innovation Research Labs show that the average new single-family home uses more than 2,200 square feet of softwood plywood, and more than 6,800 of OSB, in addition to roughly 15,000 board feet of framing lumber. …I may take at least a few weeks to a couple of months for builders to see price relief on the order initially reported in the lumber futures or cash markets.

Across the country, many would-be homebuyers wait with bated breath for interest rates to make a meaningful drop before they either purchase their next home or their first house. Persistently elevated rates have made it nearly impossible for lower-income mortgage applicants to qualify for financing. Meanwhile, those who purchased or refinanced a loan while record-low interest rates were available are staying put. Federal Reserve Chairman Jerome Powell announced at the latest Fed meeting that they were not going to raise the federal funds rate, the upper limit of which has been at 5.50% for nearly a year. This means the rate cuts hoped for in June will have to wait until more progress is made on tamping down inflation. The prime rate, which moves in tandem with the federal funds rate, has been unchanged at 8.50% since August. 

Fueled by a lack of existing inventory and pent-up demand, single-family permit growth is occurring across all tracked geographic regions of the nation. The opposite holds true for the multifamily sector, according to the latest findings from the NAHB Home Building Geography Index for the first quarter of 2024. After continued declines in the growth rates of the single-family Index, all markets moved into positive territory for single-family construction. This marks the first time since the first quarter of 2021 for which all regions are showing year-over-year growth. Single-family growth rates declined to lows in the first quarter of 2023, but as lack of existing inventory and pent-up demand started to have a larger effect, single-family construction moved upwards over the year. …Looking at single-family HBGI market shares, small metro – core counties continued to have the largest market share at 28.8%.

Due to tightened monetary policy, the count of open jobs for the economy and construction is declining. This is consistent with a somewhat cooler economy, which is a positive sign for future inflation readings. In April, the number of open jobs for the economy fell to 8.06 million. This is smaller than the 9.90 million estimate reported a year ago. NAHB analysis indicate that this number must fall back below 8 million for the Federal Reserve to feel more comfortable about labor market conditions and their potential impacts on inflation, which means we will be near that range in the coming months. While the Fed intends for higher interest rates to have an impact on the demand-side of the economy, the ultimate solution for the labor shortage will not be found by slowing worker demand, but by recruiting, training and retaining skilled workers.