According to a report released yesterday, the median price of a home in the United States has risen to levels not seen since 2008. The national median home price is now US$266,000. In just the fourth quarter of 2016 alone, there was a 10 percent increase in the monthly payment required to purchase a median home. Will this reduction in affordability induce a slow down and mark a new top in the national housing market? Or will it spark stronger momentum in home construction for continued growth?
To answer this question, let’s look at what is behind the current 5-year rise in home prices. Has the driving factor been speculative investment like that which lead to the run-up in home prices in 2008? Or is the current rise in home prices being driven by market fundamentals – specifically, a shortage in housing supply? A look at housing starts over this same period suggests the latter. Current home price increases are a result of a supply shortage.
This chart illustrates the slow pace of new housing starts since the 2008 crash in construction. In December of 2016, housing starts reached an annualized rate of 1226 thousand. This is up from a record low of only 478 thousand in April of 2009; but, it’s still well below the average of 1439 thousand. And, it’s just half the record of 2494 thousand set in January of 1972.
So, according to this data, if home prices in the U.S. are rising as a result of a supply shortage, and not a speculative bubble, then this should lead to a continuation of strength in the the U.S. construction market.
The latest survey of home builders supports this case for optimism. The single family housing index (55+ HMI) jumped 8 points to 67 in the fourth quarter – the highest reading since the inception of the index in 2008.
This data bodes well for U.S. lumber demand. Of course a number of events could derail this. And the unwinding of Federal Reserve policies is anticipated to begin in Q4 and increase mortgage rates above 6 percent within three years. But this latest data gives reason to believe that the short to medium-term forecast for lumber demand in the U.S. is strong.
In a potential sign of this new strength, March 2017 lumber futures are up 10% in five days with good volume.
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