Rise in optimism in US housing market?The outlook for US housing markets has improved in recent months and some analysts are forecasting starts will exceed 1.0 million units in 2013. How realistic is this? To answer this question, we need to look at demand for housing which is ultimately measured by new home sales.
Single-family home sales came in at 372,000 in July and have averaged 363,000 over the past six months. Because not every new home started is sold (about a third of homes are built for the owner), builders would have to begin construction on between 550,000 and 560,000 single-family homes just to keep inventories flat assuming sales remain at recent levels. If we assume a 68% single-family share, this means builders need to begin construction on 840,000-850,000 total units just to keep inventories flat.
With the new single-family home inventories at 142,000 units (far and away the lowest level ever) and 4.6 months’ supply, builders are more likely to grow inventories than hold them flat. If we assume builders wanted to build inventories by 40,000 units (bringing them back in line with their previous lows from 1967), home sales would need to be just 396,000 units for the year to get starts above 1.0 million units in 2013. This is just 8% above the May-July sales levels.
What does this mean for forest products producers? While housing starts might not exceed 1.0 million units next year, barring a slowdown in employment growth, they will be significantly higher than they were in 2012. This will almost certainly mean an upside surprise for solid wood products manufacturers with the attendant higher prices and increased supply of residuals which will drive down chip costs for pulp mills.
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