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What does a tight US housing market mean for rail?

US carloads of forest products up 1.7% for first five weeks of 2021

A tight U.S. housing market could support lumber and wood carloads. (Photo: Joanna Marsh/FreightWaves)

The U.S. housing market was tight in 2020, and that trend could continue into 2021, analysts say. Furthermore, that housing trend could have significant volume implications for lumber and wood shipped by rail.

“Home building is the biggest driver of lumber and wood products carloads. Given the home affordability issues in many places, lack of adequate inventory, and people looking for more space with single family homes who aren’t going to go back to offices, lumber and forest products could be a positive for rail volumes for some time,” said Mike Baudendistel, FreightWaves market expert for rail and intermodal.

Indeed, “the landscape for housing has certainly been an interesting one. The segment powered through the pandemic in 2020 and that momentum is going into 2021,” said Anthony Smith, economist and FreightWaves market expert. “The existing home inventory is tight and keeping prices high.”

U.S. lumber and wood carloads (blue: RTOLW.USA) and Canadian lumber and wood carloads (green: RTOLW.CAN) over the past year. The data is from AAR. (FreightWaves SONAR)

Rising housing starts is one reason why U.S. lumber and wood carloads are up. Single-family housing starts, or the number of new single-family homes under construction, have risen by 51% over the past five years, according to FreightWaves’ SONAR data. Total construction spending is up 77%.

Residential construction spending (blue: COSP.RES) has grown by 77% over the past five years, while U.S. single-family housing starts (red: SFAM.USA) have risen 51% over the same period, according to SONAR. But multifamily housing starts (green: MFAM.USA) have fallen 5%. (FreightWaves SONAR)

One trend to note is that the housing market is seeing a geographical shift toward lower-density areas.

“Other significant trends within the year will likely be exodus zones. Americans who can adapt to the remote working lifestyle are opting out of large metropolitan areas such as New York and California,” Smith said. 

“The South and Midwest regions will likely get a bump in activity as more individuals decide to live in a place where their money might go a little further. Those who choose to remain in the pricier city regions may also decide to leave those zones and move further into the suburbs. This movement will likely persist into at least mid-2021,” Smith said.

Over the past five years, housing starts have risen in three of four U.S. regions, according to SONAR data. Housing starts fell in the Northeast by 26%.

U.S. housing starts over the past five years by region: South (blue: HOUS.URST), West (green: HOUS.URWT), Midwest (red: HOUS.URMW) and Northeast (purple: HOUS.URNE). The data comes from the U.S. Census Bureau. (FreightWaves SONAR)

“Single-family homes will be in high demand as a result. Multifamily units are a smaller and more volatile subcomponent of total housing starts and will likely take a backseat to traditional single-family units,” Smith continued.

The National Association of Home Builders (NAHB) estimated that single-family housing starts in 2020 were just under 1 million, 11% higher than 2019. The trade association forecasts ongoing gains for single-family construction in 2021, although the growth rate will be slower. Single-family housing starts could grow by 5% to 1.03 million in 2021, which NAHB says would be “the first year that total annual single-family production has exceeded 1 million since the Great Recession.”

But multifamily construction could continue to experience weakness in 2021 amid rising vacancy rates and slowing rent growth, NAHB said in a Tuesday release.

Another factor that could influence housing market activity in 2021 is costs. Higher costs for lumber could translate to increased building costs for single-family homes. 

“New builds are still facing the issues of limited lots/land and labor constraints in some regions. One of the most significant variables is material costs. Lumber prices are on the rise, which will impact the cost of building a new home and renovations,” Smith said.

Said NAHB Chief Economist Robert Dietz, “While supply-side pressures, such as resurgent lumber prices, a shortage of buildable lots, inconsistent access to building materials and a regional skilled labor deficit foreshadow higher costs and longer build times this year, a changing regulatory landscape threatens to further erode housing affordability and make the tight inventory environment worse.”

But for now, the upward trend in housing starts has helped prop up U.S. forest products traffic. 

U.S. carloads of forest products are up 1.7% for the first five weeks of 2021 to 50,328 carloads, according to data from the Association of American Railroads (AAR). Forest products include primary forest products, lumber and wood products, and pulp and paper products.

On a weekly basis, U.S. forest products carloads were 2.4% higher than a year ago for the week ending Saturday, totalling 9,954 carloads.

However, these gains in forest products weren’t enough to offset lower carload volumes, which continue to be under pressure from declines for coal and energy products. Weekly U.S. carloads slipped 2.5% year-over-year to 226,393 carloads.

But higher intermodal traffic gave overall U.S. rail volumes a boost. U.S. intermodal volumes rose 6.4% to 269,422 intermodal containers and trailers for the week ending Saturday, according to AAR. The gain helped overall U.S. rail traffic grow 2.2% year-over-year to 495,815 carloads and intermodal units.

U.S. rail carloads (blue: RTOTC.USA), intermodal trailers (orange: RTOIT.CLASSI) and containers (green: RTOIC.CLASSI) over the past year. (FreightWaves SONAR)

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.