While most expect the market's bottom has already been reached, recovery depends on too many unknown factors
Two of the country's most respected forest product analysts are guarded when it comes to predicting how the housing market will act in 2010. Although many in the business believe the bottom in the housing market has been reached, the bigger question is how quickly - or slowly - it will rebound.
"The thinking is that housing hit a bottom in 2009 and there is going to be some recovery in 2010," says Shawn Church, editor of Random Lengths, a weekly newsletter based in Eugene, Ore., that has been reporting prices, analyzing markets and examining issues affecting the wood products industry for more than 60 years. "How strong that is going to be is some question because there are a lot of headwinds out there still in terms of credit available not only to home buyers, but to builders themselves. Housing's fortunes have always been linked directly to job growth and we all know what that situation is right now. So there has to be an expectation that we're adding jobs before housing changes materially, significantly."
"2009 was a miserable year in lumber," reports Mark Wilde, a paper and packaging market research analyst for Deutsche Bank in New York. "Extremely weak housing starts put pressure on the [Random Lengths] Lumber composite, with prices averaging $222/mbf, its lowest annual level since 1986. Weakness was most severe in the first six months of 2009, with the composite averaging $203/mbf through June - the lowest level since the first six months of 1985.
"The composite has now declined for five consecutive years, after reaching the peak of $404/mbf in 2004. Interestingly, sentiment within the trade appears to be improving. Much of the optimism seems to revolve around supply reductions than any marked improvement in demand."
According to the 2010 Random Lengths housing outlook, taking the average forecast numbers from the National Association of Home Builders, Fannie Mae, Freddy Mac, mortgage bankers and realtors, the total number of housing starts is projected to be about 740,000 units in 2010, compared to 550,000 in 2009, a significant increase percentage-wise, but still a historically low number.
"Generally speaking, wood products traders, the people in the industry, are more optimistic simply because we're at the bottom looking up as opposed to a year ago when we were in free fall looking down," Church says. "It's a better position to be in than we were a year ago."
One big question mark is what happens when the home buyer credit expires, which most feel was successful in 2009.
"Even though we were historically low in 2009, without it I think we would have been even lower," adds Church. "I think it will be interesting to see how the market holds up after that medication, if you will, is cut out, with the tax credit ending April 30, the Fed winding down its purchasing from Freddie and Fanny and interest rates forecasted to go up. Once that stimulus is removed, how healthy will the market be to carry on its own?"
This article originally appeared in the February 2010 issue.