US Housing Market Uncertainty
Recent data from the US Census highlights a mixed picture of the housing construction sector. May witnessed a 5.5% decline in housing starts from April, marking the slowest pace of construction since June 2020, with just 1.277 million units. However, a bounce-back occurred in June, with starts increasing by 3.0% from May to 1.353 million units.
Notably, upward revisions were significant, with April and May adjusted a total of 62,000 higher. The regional analysis for June showed increases in the Northeast and Midwest by 34% and 27%, respectively, suggesting a nuanced regional recovery pattern.
Demand dynamics and price pressures
The observed stagnation in housing demand is mirrored in both wood product prices and industry sentiment. According to the Random Lengths dealer survey, lumber and panels sales expectations are the lowest they have been since at least 2014. Meanwhile, new home sales have experienced a downturn, falling 11.3% in May and 16.5% year-over-year, underscoring the challenges facing the market.
Rate cuts on the horizon
The broader economic environment, particularly the anticipation around Federal Reserve (Fed) policies, plays a crucial role in shaping market expectations. With recent inflation readings suggesting that price increases are not accelerating, bond markets are feeling more optimistic about some rate cuts this year.
In a speech in July, Chairman Powell maintained a non-committal stance on the timing to cuts. Still the market is hopeful for a rate reduction in September, driven by moderating inflation, rising unemployment, and cooling hiring rates. Although, the risks are rising that the Fed may be waiting too long to begin easing – such adjustments could alleviate pressures on construction activity, which has been hampered by the current high-rate environment, despite strong demographic tailwinds.
The onset of lower rates should spur more housing demand overall. Our forecast is now calling for housing construction to rise 11% in 2025 as builders again attempt to work toward remedying the undersupply in the market.
Lumber market dynamics
Consumption indicators present a mixed picture for the lumber market, with peak seasonal demand failing to significantly tighten market conditions. The notable decline in lumber futures prices reflects a broader industry sentiment downturn, with southern yellow pine (SYP) markets particularly affected. Despite minimal supply chain disruptions, the industry remains cautious, awaiting a potential shift in Federal Reserve policies and subsequent interest rate adjustments.
Looking ahead
As the US housing market navigates these complexities, the potential for a revitalized construction sector in 2025 is emerging. Our forecast is now calling for housing construction to rise 11% in 2025. This growth is expected to address the current undersupply and stimulate market recovery.