When Time magazine’s cover story is on America‘s obsession with real estate, that’s a sure sign the peak for building supplies has arrived, according to Paul Quinn, forestry analyst at Salman Partners.

“Americans are spending money on real estate like never before,” Quinn says in his current research paper to investors. “In our mind, this is a sure sign of the peak of the market. Demand can only get weaker going forward as borrowing rates rise. Prices will not be sustainable once investment demand is taken out of the market.”

Time’s June 13 cover story, Home Sweet Home, depicts a homeowner hugging his house.

Quinn said the market for building products has never been stronger, so it’s time investors considered profit-taking in the lumber and panel board sectors. Conditions are not likely to get any better than they are right now, he said.

Quinn said 23 per cent of home purchases in the U.S. are now for investment purposes, well above the norm of eight to 10 per cent. He said regions of the U.S., like Las Vegas, where prices are up 50 per cent over last year, are definitely in a real estate bubble.

It’s a matter of when, not if, the turn comes, Quinn said in an interview. He gives it no more than six months.

“I don’t think it gets higher. But what it’s going to take [for the market] to come off are rising long-term rates, slower employment growth, or a lack of home appreciation.”

He is looking out for an upward movement in long-term mortgage rates. Short-term interest rates are rising, but long-term rates are being kept low by Chinese and Japanese investors buying up U.S. 10-year bonds, propping up the U.S. dollar, and in the process maintaining favourable exchange rates for their consumer goods.

Laurie Cater, publisher of Madison‘s Canadian Lumber Reporter, agrees there is reason to be wary in today’s building products market, but added that the same sentiment existed last year. Yet the housing boom has not let up.

U.S. housing starts have climbed from 1.71 million in 2002 to 1.95 million in 2004, and are on track to hit 2.07 million this year.

Cater said the heavily levered mortgage vehicles now available in the U.S., specifically where investors only need to make interest payments, worry him because when demand does turn, it could turn hard.

At West Fraser Timber, the second largest producer of industry-standard spruce, pine and fir construction lumber, sales vice-president Ernie Thony said lumber demand remains strong. Supply is increasing as mills ramp up production here and in the U.S.

“Sales are still robust,” Thony said. “I think it looks pretty good this year, but I don’t think we are going to see the prices we saw last year.”

SPF lumber has dropped from $433 US a thousand board feet in 2004 to $365 US today, largely because of the supply-side increases. Current prices are still profitable for B.C.’s lean lumber industry, despite tariffs averaging 21 per cent on exports to the U.S.

Quinn recommends investors take their profits now because until demand weakens, the supply-side increases are going to keep prices from climbing much higher. Major U.S. homebuilders are reporting home order files of over six months, but there is no shortage of wood, particularly oriented strand board (OSB), a panel board that has virtually replaced plywood in the U.S. housing market.

He notes that 14 new OSB mills have been announced or are under construction already, with the first one on stream this month and another two before the end of the year.

And the mountain pine beetle has led to an increase in lumber production in B.C.

At the same time, western U.S. production is up, as are imports from Europe.

Quinn said when the downturn comes, he expects OSB plants to feel the pinch more than lumber producers because of the huge supply-side increase.

“I think it’s all over for those guys,” he said of OSB.

“But lots of lumber companies are in very good shape in terms of their balance sheets. They are pretty low-cost companies. They will still do well even with lower prices,” he said.

“As well, all of them have this huge softwood lumber deposit, which at some point will get resolved. I don’t think that has adequately been reflected in the share price right now.”

© The Vancouver Sun 2005