Gordon Hamilton
Sun
A Conference Board of Canada report released Monday is forecasting an escalating decline in U.S. housing starts in 2007 severe enough to hurt Canadian forest products companies but not enough to send the U.S. economy into recession.
In its Autumn U.S. Outlook, the conference board forecasts a 10-per-cent decline this year in housing starts and an additional 18 per cent in 2007.
The conference board position on housing is considered dramatic by industry analysts. The board states that it is basing its forecast on past downturns, where slowdowns have been deeper than most predictions.
“Homebuilder confidence is plummeting, the stock of unsold homes is soaring and house prices are either flat or declining in some regions of the country,” the report says of the U.S. market.
Using housing sales as gauge, the conference board notes that slowdowns in the 1970s and 1980s lasted for around four years with drops of more than 50 per cent for both new and existing home sales.
Sales declines in the last 12 months have averaged only nine per cent to 16 per cent so far, the report states, indicating “that there is still plenty of room for this market to correct over the next few months.”
At the same time the conference board released its forecast, Barron’s reported an increase in construction spending in the U.S. of 0.3 per cent to $1.2 trillion US in August over July, beating expectations of a 0.4-per-cent decrease.
Mark Bishop, analyst at RBC Capital Markets, said no matter whose numbers prove to be most accurate, the trend is negative for U.S. housing into 2008.
“I don’t think we would be as negative as 18 per cent, but certainly the trend is negative throughout 2007 and into 2008.
“We would expect ’08 to be the bottom for housing and in terms of the average we would expect to see ’08 to be weaker, but in the second half starting to show some reasonable potential for increases,” Bishop said.
Bishop said share prices of publicly traded U.S. homebuilding companies have stabilized after a drop earlier this year, an indicator that investors do not see a disastrous decline in starts. Bishop’s own forecast shows a decline in lumber consumption in the U.S. from 64.6 billion board feet a year at the market peak in 2005 to 57.2 billion board feet in 2007.
That will mean curtailments across the country, he said, with Eastern Canadian companies being hit hardest. He singled out pulp and paper companies, saying the sawmills they own and rely on for wood chips will have to take downtime, hitting their lumber revenues and boosting chip costs.
Analyst Paul Quinn, with Salman Partners, issued a research paper Monday forecasting that when the shutdowns begin, they will be swift and brutal.
“Declining lumber consumption in 2006 and 2007, led by the much softer housing market, will continue to play havoc on the profitability of lumber producers,” he said in his report. “However, we suspect that the market correction will be quicker than usual as the current situation places many Canadian operations in the red. We expect prices will rebound slightly in mid-2007 after the expected closures become felt through the distribution channels.”
© The Vancouver Sun 2006
