February 2012-Timber Market Update

February 2012

Timber Market Update

by Dr. James Henderson, Extension Forestry

Our best leading indicator for Mississippi's timber market is U.S. housing construction. For the first time in a very long time there is some good news on that front, and if these positive developments continue, we should see mild but sustained increased demand for Mississippi timber products over the next several years. Home construction, starting from the recent modern historic low of 478 thousand set in April 2009, has annually averaged 554 thousand units in 2009, 585 thousand in 2010, and 607 thousand in 2011. So the trend is positive over the last three years, and building permits for December have increased to 679 thousand units implying continued increase for housing construction over the next several months. It appears that the housing recovery is underway and increased demand for timber should follow suit.

There are a few potential disruptions to the U.S. housing recovery that haven't played out yet. These include a new wave of home foreclosures and the prospect of a major recession in Europe that would have reverberations on the U.S. economy. Increased foreclosures could potentially flood the U.S. housing market reducing demand for newly constructed homes. The U.S. Housing and Urban Development Secretary indicated that a settlement between major mortgage lenders and 50 state attorneys general is only days away. Many analysts are skeptical that this deal will do little to stem foreclosures that were delayed when the major mortgage services temporarily halted foreclosures in many states in the wake of public uproar over over poorly documented foreclosures that came to light in 2010. Some estimates indicate about 4 million distressed properties that comprise this "shadow market" of homes that are keeping home values from rising and the home construction sector from growing. There is a lot of uncertainty and only time will tell. The success of this settlement at reducing foreclosures will be important for increased home construction and our timber markets.

Stumpage prices for Mississippi as reported by Forest2Market continue to remain at low levels causing many landowners to hold timber longer than they ever intended. Pine sawtimber and chip-n-saw as of the 4th quarter of 2011 were at $26.45 and $14.21 per ton, respectively. Prior to the bursting of the housing bubble in 2006 these products were averaging around $45 and $25 per ton. However, if the national economy continues to improve as it has been doing over the past several months with GDP forecast to be around 3 to 4 percent in 2012, we will see continued decline in unemployment, more private sector jobs being added, and more new homes being purchased. Again, the mortgage-service settlement will have an impact and the details of this should emerge in February. As demand improves prices should increase; however, the accumulated volume resulting from lower harvest rates over the past 4 years will result in a much larger supply of harvestable timber. This increased potential supply of timber may keep timber prices "sticky" as demand may not be strong enough to raise prices.