There is a quandary in the housing market. Interest rates are up, and there is a continued threat by the Federal Reserve to continue rate increases. Wages have increased in the last 12 months, but this is being eaten up by increases in essential living items like groceries and gas. A housing shortage has kept prices of existing homes at the highest prices in history. Combining housing prices and interest rates makes home affordability at the highest cost of all-time.
This graph depicts the rate of homeownership in the U.S. since 2000. In 2005 home ownership peaked at 69.2% of the population in this country. The average Fed Rate in 2005 was 3.22%. Soon to follow this period was the Great Recession, which took our country years to recover from. Many homeowners were underwater with their mortgages and needed to find housing alternatives beyond ownership. This phenomenon led to a low ownership rate of 62.9% in 2016. Interestingly, the Fed started to raise rates in 2016.
Following this low rate of homeowners is the millennial generation, that in, 2019 took over the U.S. population from the baby boomers. Combining that generation with Gen-Z, the housing market is ready for another increase in demand. However, the aggressive Fed policies that resulted from COVID, which included printing an unprecedented amount of money and interest rate hikes to mitigate the damage, have led to the housing market problem we have today. Millennials are staying put in their existing homes, and Gen-Z is living at home with their parents. (This I know from personal experience.)
What does this have to do with the logging industry? Hardwood sawmills are dependent on home construction completions. Completions vs. starts are most important, as finished flooring, cabinets, moulding, and wood furniture are some of the last items installed when houses are built. When housing declines or affordability becomes prohibitive, fewer of these wooden items are purchased, and demand for hardwood can dive off a cliff.
There is a saving grace in the hardwood lumber business when housing completions and ownership are low, and that is remodeling. Remodeling typically increases the quality of home furnishings. Included are more hardwood products that have proven time and again to increase home values. At this point, remodeling is projected to slightly increase in 2023. However, there is some skepticism among hardwood producers that the millennial generation is using cheaper wood imitation products to mitigate costs and bide time until they move into a more permanent residence.
Let’s put a wrap on this. Aggressive monetary policies are bad for businesses. Interest rate increases affect the affordability of our logging equipment, trucks, and our customer’s businesses. COVID hit the world, and governments chose to shut down production and make it up with printing presses. Inflation was inevitable. The only known method to cool inflation is to raise interest rates. However, we have a deteriorating situation in the timber and housing industries. I think it is time the Fed eased off on interest rate increases and allowed the economy to equalize itself again.