Softwood Markets

Softwood Lumber and US Housing Starts

Softwood sawtimber is a major component of timberland value and returns for most institutional timberland investments. The production of softwood lumber (made from softwood sawtimber) in North America, is closely related to US housing starts (Figure 1)). The linear trendlines show strong R2s.

Figure 1. US Housing Starts and North American Softwood Lumber Production

Source: US Census Bureau and Random Lengths

So (1), if we think we know what housing starts are going to do in the future, we will also have an idea of how much softwood lumber will need to be produced and, therefore, what the demand for softwood sawtimber will be. So (2), what are housing starts going to do the future? What factors affect housing starts?

US Housing Starts and Household Formation

New households require new housing units, so changes in household formation should give us an idea of how many housing units are needed, shouldn't it? Surprisingly, the household data are not helpful--at least in their raw form.

The Census Bureau publishes data on household formation based on its monthly estimates of changes since the most recent decadal census. Quarterly changes can be calculated from the published data. But, the Census Bureau resets the numbers after each census, and sometimes the adjustments are substantial (Figure 2). For example, 49 mm households were removed in 1961-Q3 and 50 mm households were added back in 1961-Q4. The adjustments make it difficult to see what is really going on.

Figure 2. Changes in US Household Formation Data

Source: US Census Bureau

If we take the big adjustments out, we get Figure 3.

Figure 3. Changes in US Household Formation With Big Adjustments Removed

Source: US Census Bureau

Using the changes in household formation from Figure 3 and the housing starts from Figure 1 we see that the relationship between the two is not really that strong (Figure 4). The correlation coefficient is very weak (0.0064), probably because the change in household formation is sometimes negative and housing starts never are. So, for now, household formation does not help us estimate housing starts.

Figure 4. Changes in US Household Formation and US Housing Starts

Source: US Census Bureau