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Headwinds loom for trucking and construction

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As capacity continues to increase in the trucking industry against the backdrop of record levels of new truck and trailer orders in late 2018, outbound tender volumes are only down 3.96 percent year-over-year, setting up an interesting scenario heading into the all-important summer construction season. Trucking is traditionally seen as an early indicator of overall economic strength with some ominous signs on the horizon, especially in the lumber and housing construction sectors.

Construction in the residential segment has been underwhelming so far in 2019. Housing starts jumped 5.7 percent in April compared to March, but remained 3.2 percent below year-ago levels. Single-unit starts make up the majority of overall starts and are down 4.3 percent from April 2018. Existing home sales are down 0.4 percent from March and 4.4 percent below the same month one year ago. Each segment is facing headwinds, and builders are plagued with limited labor, availability of lots to build on, and weather events earlier in the year. All of these factors are playing a role with the current inadequate supply and increasing home prices.

The stage is set on the demand side; the typical headline items over the last few months still hold. Lower mortgage rates, historically low unemployment, substantial wages and steady consumer confidence levels that seem to keep climbing are all in place. There is an appetite for new and existing homes, but there is a mismatched supply. The demand lies with homes on the lower end of the price range, around $250,000 and lower. Due to the issues mentioned earlier, builders’ margins are shrinking for new homes, and existing homes on the lower end of the price range are limited, with available units selling quickly.

Where does this leave lumber?

The general moderating trend for housing starts means there isn’t as much as a demand for softwood lumber, resulting in a surplus. The glut translates to lower prices and too much capacity in the market. Therefore mills are reducing shifts or shutting down altogether to compensate for the excess supply. The commodity price hit record highs about a year ago, reaching levels just over $600 per 1000-board feet. Current prices are hovering around $300 per 1000-board feet.

West Fraser is the largest softwood lumber producer in the world, producing 6.6 billion board feet in 2018, and is temporarily closing five sawmills in British Columbia. The temporary shutdowns are not limited to Canadian softwood producers, but they also face difficulties due to U.S. tariffs that have been in place since 2017.

Canadian spruce is a common species used for framing, and according to the National Association of Home Builders, the roughly 20 percent tariffs on Canadian softwood can add $9,000 to a typical new home and just over $3,000 for a multi-family unit.

The tariffs coincide with a time where home affordability is holding back pent-up demand. Conifex Timber is another Canadian producer that will be curtailing production and taking time to optimize operations; however, the reductions will be at its U.S.-based El Dorado sawmill.

As mentioned earlier, existing home sales have yet to pick up steam on a year-over-year basis. Although housing starts have a more direct relationship with flatbed movement of building materials as construction breaks ground, existing home sales are also a relevant measure to observe.

Existing homes makeup around 90 percent of total home sales and can help drive both lumber and freight activity when looking at remodeling projects. The Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University released new projections for its Leading Indicator of Remodeling Activity (LIRA). Although the Center does not expect spending levels to decline in any major metro areas, there will be a deceleration in the pace of spending in 29 of the 49 major markets tracked. The rate of change for the LIRA is projected to drop throughout the remainder of 2019.

Entry-level homes beyond the reach for many consumers

Pricing seems to be the main factor holding would-be buyers back from making home purchases despite current mortgage rates. The median price for existing homes is up 3.7 percent in April compared to one year ago, making this the 86th consecutive monthly increase. The most significant year-over-year sales increases were in the Midwest and South regions, up 5.6 percent and 4.4 percent, respectively.

First-time home buyers make up roughly 30 percent of existing home purchases and current prices are causing lower-cost and entry-level homes to be pushed out of reach for many of these consumers.

Fannie Mae conducts a monthly survey to gauge consumer sentiment about purchasing a home. The survey covers consumer outlook on whether consumers think it is a good time to buy a house, how they think home prices will move over the next 12 months, job security, household income and direction of mortgage interest rates. The results are aggregated into a single number, but the components allow tracking on what segments of sentiment are influencing levels up or down. The most recent reading for Fannie Mae’s Home Purchase Sentiment Index (HPSI) rose 3.7 points in May to 92.0, nearly a survey high.

The main component that bumped results up in the latest HPSI survey was an increase in the “Good Time to Buy” component. Respondents are expecting more decreases in mortgage rates in the next 12 months. Expectations of a drop in mortgage rates may signal that there is not as much urgency to buy right now. Coincidently, mortgage applications dropped in May according to survey data by the Mortgage Bankers Association, but recently had a slight bounce back in the latest week of data in June.

There is a current disconnect with the high sentiment for consumers and tangible results for actual residential construction spending. Residential construction accounts for nearly 40 percent of total spending and is currently down 11.2 percent from the year-ago level.

The decline in residential construction spending translates into lower levels of building materials such as lumber moving across the country via flatbed, and this is something that impacts operators. The flatbed tender rejects are also down in comparison to this time last year. As capacity increases, loads get rejected at a lower rate.

FreightWaves SONAR: Total Construction Spending, Residential vs. Flatbed Tender Rejections

The sluggish start to date in 2019 for new home builds and the moderate pace of existing home sales are not alleviating excess lumber capacity on the market and limit flatbed freight movements. However, builders are feeling confident about the housing market according to the Housing Market Index (HMI), a survey conducted through the National Association of Home Builders. Survey results show that sentiment for single-family homes is at the highest level since October 2018. The monthly survey has builders rate traffic of prospective buyers, and results are compounded into an index where readings over 50 are indicative of expansion.

Builders remain optimistic for summer

The May results for the HMI posted a reading of 66, a 3-point increase from April and signaling that builders are optimistic about activity in the present and coming months. However, builders are cognizant of affordability issues and constraints to meet the demand for starter and lower-priced homes.

Together, there is optimism for buyers and builders. The foundation is solid for consumers with a stable labor market and wages. However, this does not translate to tangible results for the housing market, resulting in excess lumber and diminished flatbed transportation of building materials throughout the country. It will be a shame if builders are unable to meet the supply of homes that consumers are demanding during this time where firm financial underpinning backs overall sentiment.

The inefficiency goes beyond a lower number of housing starts this year, but spreads to additional industries, freight included. Flatbed operators bear the initial load or lack thereof, but there are downstream effects to this situation. When consumers are feeling confident and buying homes, they are also making other big-ticket purchases. When they get into those newly acquired homes, they usually fill them with new goods, furniture and appliances; most of that is transported by trucks. Should this trend persist it will add to the mounting obstacles for the movement of freight throughout the overall economy and not just stop at flatbed and lumber.

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Anthony Smith

Before FreightWaves, Anthony received his Bachelor’s and Master’s degree in Economics from New Mexico State University. Anthony started his career off in tech as a Commercialization Associate where he identified and evaluated emerging technologies and innovations. Anthony transitioned to a Corporate Economist & Consultant where he advised CXO leaders and Fortune 500 companies on economic analysis, industry trends and internal strategy. Anthony’s clients varied from construction, trucking, industrial, software, manufacturing and retail industries. Anthony most recently worked in-house as a Corporate Economist for a building products company. He led analysis around M&A, pricing sensitivity, competitive intelligence and annual sales forecast for the executive team.