18
Jun

U.S. Construction Activity

Construction U.S.A. 2Q24

Author: SC

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1. Residential Construction Activity

 

The general consensus is that since the times of the subprime crisis, U.S. housing has been underbuilt[1]. Estimates of the “hosing deficit” have a wide range, but the industry tends to put it around 4-7m homes[2]. To put this into perspective, this compares to around 1.5m homes built per year, at current run-rates, which is in line with the long-term average. In the last few quarters, homebuilders have been able to attract buyers despite the rise in interest rates, through incentives such as mortgage buydowns. At the same time, the percentage of cash-buyers has been reported at the highest level since 2014, pointing to a financially healthy demand-side[3] (in 2006, before the financial crisis, the ratio of cash buyers was around 20%, compared to around 35% at the end of 2023). If we look at housing starts per capita (Figure 1), we see that due to the rising population over the years, this ratio is now definitely at the low-end of the historical range, excluding the extreme situation after the subprime crisis.

 

Figure 1: Housing starts, reported and adjusted on a per-capita basis. Sources: U.S. Census Bureau, U.S. Department of Housing and Urban Development; U.S. Bureau of Economic Analysis; Retrieved from FRED, Federal Reserve Bank of St. Louis. Adjustments by Timber Finance.

 

2. Demographics, Supply and Demand

Only looking at housing starts, or even adjusted per capita starts, however, neglects the effect of demand arising from population growth, e.g., through immigration and births (net of mortality). The population of the United States is still growing, and this is good. Nevertheless, the rate of population growth has been in a downtrend over the last decades (see Figure 2), with moderating immigration and lower birth rates. The recent recovery after the Covid pandemic is welcome, while housing starts relative to population growth are indeed historically high. There is also some political uncertainty related to the U.S. elections and immigration policies, should Trump win again – reduced immigration could weaken demand and at the same time reduce supply, due to labour shortages.

 

Figure 2: Housing starts adjusted by YoY population growth; annual rate of population growth. Sources: U.S. Census Bureau, U.S. Department of Housing and Urban Development; U.S. Bureau of Economic Analysis; Retrieved from FRED, Federal Reserve Bank of St. Louis. Adjustments and calculations by Timber Finance.

 

While the two previous metrics (starts per capita vs. starts per population variation) have offsetting effects, it is a matter of fact that U.S. home prices have kept rising even in 2023 despite the strong and rapid rise in mortgage rates. It should be noted that even with a widespread use of financial incentives for buyers, mentioned earlier, homebuilders have been very profitable. All this indicates a tight supply/demand balance. In 2005-2006 there was an acceleration in home prices, before the sub-prime collapse; however, while in 2005-2006 the imbalance was driven arguably by demand (buyers that should have not been allowed to borrow), this time supply appears to dominate the equation (moderate housing starts and little inventory of existing homes for sale). What could invert this disequilibrium is the entry on the market of existing homes for sale. The most likely trigger for such an event would be a significant reduction in interest rates – so far, homeowners have been reluctant to sell their homes in order to buy a new one, resetting their existing, lower-rate mortgages. In such a scenario, the repair and remodel (R&R) market should outperform the new construction market, with segments such as decking and lumber outperforming OSB.

 

3. Repair & Remodelling

 

The Leading Indicator of Remodelling Activity developed by the Harvard Joint Center for Housing Studies accelerated strongly after Covid and peaked in 2023[4], consistent with the updates and results from companies in the sector. The current normalisation in R&R spending is healthy and should not come as a surprise; how it will develop from here also depends on the trajectory of interest rates, as noted earlier. Trex, the manufacturer of wood-plastic composite decking, estimates that around half of the decks in existence in the U.S. have reached the age for replacement, so despite the strength of the R&R market during the pandemic, there still appears to be fundamental support for medium and long-term demand arising from the ageing housing stock, whose average age, according to the National Association of Home Builders, has increased from 31 years in 2005 to 40 years by 2022, with an estimated 48% of the owner-occupied housing stock being older than 43 years[5].

 

 

[1] https://www.fanniemae.com/research-and-insights/perspectives/us-housing-shortage

[2] https://www.npr.org/2024/04/23/1246623204/housing-experts-say-there-just-arent-enough-homes-in-the-u-s

[3] https://www.redfin.com/news/all-cash-homebuyers-september-2023/

[4] https://www.jchs.harvard.edu/research-areas/remodeling/lira

[5] https://eyeonhousing.org/2024/02/the-age-of-the-u-s-housing-stock/

 

 

4. Disclosures and Conflicts of Interest

Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and are part of the Timber Finance Carbon Capture & Storage Index. Timber Finance Management and/or the Timber Finance Initiative may have commercial relationships or be in discussions with some of the companies mentioned in this report. Specifically, Stora Enso is a member of the Timber Finance Initiative association.

Please note that this research is prepared for information purposes and targeted to institutional investors in Switzerland. They do not represent investment advice and do not take into consideration the individual requirements, risk tolerance and goals of an investor. Recipients who are not Swiss institutional investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.

The information presented in this report is obtained from several different public sources that we consider to be reliable. Nevertheless, we cannot guarantee the accuracy of the presented information. The information used may change quickly and we are not committed or obliged to modify the reports base on new information. The opinions and views expressed in this report reflect those of the author at the point in time of its compilation and may vary at any time. Valuation methods like DCF and any other analysis or expert judgement do not provide any guarantee that the target price or fair value will be reached, for example because of unforeseen changes in financial or economic conditions.

 

For more details and questions, please do not hesitate to get in touch with us at info@timberfinance.ch or:

 

Timber Finance

Ausstellungsstrasse 36

CH-8005 Zürich

Tel. 044 991 13 44

 

 

General disclaimer © 2023 Timber Finance Management AG (“Timber Finance”). All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of Timber Finance. Timber Finance Management AG makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and Timber Finance Management AG and its third-party licensors shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. All data and information is provided by Timber Finance “as is”. Past performance is not an indication or guarantee of future results. This document does not constitute an offer of any services. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments offered by third parties that are based on that index.

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