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Fastmarkets’ Dustin Jalbert on What Lumber Can Tell Us About 2024

By Mike Simonsen on December 13, 2023


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Mike Simonsen

Mike Simonsen is the founder and president of real estate analytics firm Altos Research, which has provided national and local real estate data to financial institutions, real estate professionals, and investors across the country for more than 15 years. An expert trendspotter, Mike uses Altos data to identify market shifts months before they hit the headlines.

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Dustin Jalbert from Fastmarkets RISI’s Wood Products team to find out what the lumber market can tell us about housing, now and for 2024. Dustin shares why construction may be past its recession and is set to expand in 2024, why lumber prices may increase with demand but won’t jump big again, and how to think about demographic demands for housing in the next decade.

About Dustin Jalbert

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Dustin leads the lumber analysis on Fastmarkets RISI’s Wood Products team, where he is responsible for the monthly Lumber Commentary and the North American Lumber Forecasts, along with special client studies and consulting engagements. As a business economist, Dustin has spent nearly a decade covering the global forest products industry.
Prior to joining Fastmarkets RISI’s wood products team, Dustin provided support with forecasts and analyses related to the global packaging and pulp markets, including single- and multi-client studies. He holds a bachelor’s degree in economics and political science from the University of Maine, and master’s in international finance and economics from Brandeis University.
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Here’s a glimpse of what you’ll learn: 

  • Why the lumber market matters for residential real estate
  • What the lumber market tells us about housing now and for 2024
  • Why construction may be past its recession and is set to expand in 2024
  • Why lumber prices in 2024 may increase with demand but won’t jump big again
  • The reason why we probably can’t build our way out of the inventory crisis
  • How to think about demographic needs for housing for the next decade
  • The surprising thing that’s still in shortage, that is preventing homes from completing construction
  • What to know about sustainability in the lumber industry

Resources mentioned in this episode:

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript 

Mike Simonsen (00:02):

Welcome to the Top of Mind podcast from Altos Research. This is the show where we talk to real estate industry insiders and experts about the trend shaping the market today. Enjoy the show.

Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. For a few years now, we've been sharing the latest market data every week in our weekly Altos research video series with the Top of Mind podcast, we like to add context to the discussion about what's happening in the market from leaders in the industry. Every week, of course, Altos research tracks every home for sale in the country, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People really need to know what's happening in the market, in the housing market right now. Market was frozen solid last year. It thawed a bit this year, then it cooled again. Inventory was rising late into 2023. Really fascinating trends, but it's changing again right now.

And so if you need to communicate about the market to your clients, to buyers and sellers, I go to altos and book a free consult with our team. We can review your local market and how you use market data in your business. Alright, let's get to the show today. I got a great guest today, Dustin Jalbert. Dustin leads lumber analysis for fast markets, Rizzi, the wood products team where he is responsible for the monthly lumber commentary and the North American Lumber forecast. He spent nearly a decade covering the global forest products industry. Lumber and housing are tightly integrated markets and home builders buy a lot of wood. And so today we're going to explore the world of lumber and the economic trends and what we can see and what it tells us about the real estate market in 2024. So I wanted to have Dustin on so we could talk all things would Dustin, welcome. Thank you for joining me.

Dustin Jalbert (02:11):

Thanks Mike. It's a real pleasure to be here on your podcast. You provide a lot of valuable insights and data for the real estate space, so it's really a lot of fun to jump on today.

Mike Simonsen (02:22):

Terrific, thank you. Thank you for joining us. Okay, so we're, we're going to talk a lumber today, lumber markets, and we're going to talk about forecasting and where the economy and things like that. But first, tell us about who you are, how you got here. Give me a little bit of your journey so that establish your cred for us.

Dustin Jalbert (02:46):

Yeah, sure. I mean, being a forest products economist is a very niche skillset, so a lot of people listening in, especially if they're coming from more of the real estate world, how do you end up here? A lot of people like myself, it's sort of by accident. I mean I've been covering the forest product space for about a decade now, but when I started out coming out of college, it was my master's degree around 2012, the economy for someone with sort of a business economics background was still kind of tough. So I was looking for work and I remember one of my professors told me, she said, you're from Maine, right? And there's a company up the road, the company is called rei, and it was sort of in later years acquired by fast markets, but they focused on the forest product space, both price reporting and economics.

And she said you'd be a perfect fit. You grew up around paper mills and things like that. And I grew up in Maine, but I didn't really have a background in paper, but little did I know my career would be launched into the forest product space. Yeah, I mean my background, I've been covering again for about a decade now. I actually started on the paper packaging side pulp, market pulp, which is just basically sort of ground up wood fiber shipped all over the world. I worked on those teams for a while and I've been covering sort softwood lumber for our team and the wood product side for about five years now. So that has been when I jumped in talk about an exciting time to jump into the lumber space and the housing space. So it's been pretty fun so far.

Mike Simonsen (04:27):

That's fascinating. Okay, so you're from Maine. Maine has lumber and you happen to be an economist, so you end up there. That makes sense to me actually. So the question though is then tell me about the interplay between lumber and housing. I know you follow housing closely, and so tell me about that interplay. Why should I care about lumber? What is it telling me about the future? Give me some insight there.

Dustin Jalbert (05:05):

So I mean I think for most people, even kind of the novice observer of the lumber market, I think most people recognize it's integrally tied into residential construction based on our data at fast markets. We do a lot of forecasting market research in the space on top of the price reporting that we do in the forest product space. And our own estimates are about, at least for softwood lumber, and it's similar for structural panels like plywood, OSB, around 75 to 80% of demand comes from the residential construction space. So as goes the housing market, so goes lumber, structural panels, OSB, all those types of products to frame a house. So that's probably not too surprising to the listener. Where I think to kind of cut it a layer deeper where people I think are maybe less would be surprised to hear is at least for lumber, softwood lumber, the largest single end use market of that residential construction piece is actually repair and remodeling.

It's actually bigger than new home construction. So that is usually a surprising piece of the puzzle for people because usually people who follow lumber, they follow housing starts, they follow housing completions permits, those types of things, which that's probably about a third of the market when you look at single family and multifamily combined. But 45, 40 to 45% of demand comes from this repair and remodeling space, which is obviously major home renovations, but also anything down to what we call over the shoulder or weekend warrior type projects through Home Depot, a sizable piece of the market that drives the demand side. So that's kind of how I would characterize it just from a macro sort of big framework.

Mike Simonsen (06:59):

So that makes a lot of sense. There's a lot of Home Depots and Lowe's in this country and they are stacked with wood for primarily things like remodel kind of projects.

Dustin Jalbert (07:13):

Yeah, yeah, exactly.

Mike Simonsen (07:15):

Okay, so when we talk about forecasting, I know there are times, and I read people, a lot of times it's the folks who are housing market crash. People will say, oh, the lumber market is doing this and therefore housing is going to crash. Do you have forecasting ability? What is the lumber market? What are key things that could tell us about the future of housing and real estate and what is it telling us?

Dustin Jalbert (07:56):

Yeah, so I think we have to be careful, right? Because the lumber market, when you look at prices, if people are looking at the futures contract price, which is usually what the common person is looking at, if it's not our own kind of fast markets reported random lengths prices. But I think the thing to remember with lumber, first of all, right? It has its own supply and demand dynamics. Certainly the demand side is very closely tied with residential construction, both new construction and repair and remodeling, but the supply side has different dynamics. You can have markets where sawmill output is outpacing demand even in the growth market. So sometimes, for example, right now lumber prices, they are above kind of pre covid levels or pre pandemic levels, but they are fairly suppressed right now. They're off the very, very high pandemic peaks. They're now for some mills, they're at their breakevens from a cash cost perspective.

So if you look at that right now and you just use that to extrapolate housing starts, you might think, well, if housing starts are going to be pointing down for next year, and that's not necessarily true again for those supply side related reasons. And also there's that whole repair and a modeling piece. So I think from a forecasting perspective, I do think the causation goes from housing to lumber more than lumber to housing. Now what I will say is we do have some kind of things that can, some of the indicators we look at internally for example are random links team. They're the price reporting team that reports the actual market prices for basically all the different dimensions of lumber. So it's sort of the editorial side of our business. They have a great little dealer survey, so lumber dealers mostly, so not necessarily the Home Depots and Lowe's of the world, but more the smaller independent yards.

And that dealer survey provides a lot of good insight on the demand side. If you think of it as sort of like the HMI from the NAHB, it's very similar in terms of the sentiment indicator on demand, the demand side. And so right now you see demand has bounced back a little bit, but demand sentiment is fairly suppressed right now. Those are kind of things that we look at to read through the tea leaves and see that okay, we're seeing what the housing data is being reported between new construction repair and remodeling, but here's what it's actually looking like on the demand side from a wood products perspective. Sometimes those don't always connect and it has to do with these individual pieces, what's happening in repair and remodeling, what's happening in new construction, single family versus multifamily, all those things.

Mike Simonsen (10:44):

Okay, so there's a lot of variables that go in there. You said a couple of things that I want to ask about. You said that lumber prices are actually kind of suppressed right now, low-ish, higher than pre pandemic, but way off the inflation poster child of the pandemic boom was lumber, right as the lumber prices were up. And so prices are way back down now. So first question there on pricing of prices of lumber, is lumber and wood products maybe in general, is it deflationary in this moment? Is it

Dustin Jalbert (11:28):

Well, so I mean when you think about it from the construction cost perspective, so it is one piece our clients, we work from everyone from the landowner, the timber grower to the sawmill to wholesaler too. We also work with home builders too. And when you talk to home builders, the framing piece of the equation, that is a piece of construction that they've gotten some relief. You think about lumber prices, if you look at our random lengths composite price, it went from, let's call it $350 per thousand board feet to peaking out between 1500, $1,600 per thousand board feet. And now we're kind of in the 400 to $500 range.

The builders are seeing that flow through into their costs, and it happens with a lag because for a variety of reasons, a lot of these builders have rolling contracts with their suppliers in some cases. So it can take a quarter or two, but it is a piece of the equation. You think about framing costs with labor, that's about 20% of residential construction costs according to the NAHB. So that's a piece of the puzzle. There's deflation in construction, but a lot of the other pieces though, the labor windows and doors and cabinets and things like that, not seeing that as much from our understanding, but the framing, you are getting some relief. You're a builder.

Mike Simonsen (13:00):

Interesting. So the more value added products, the products further down the chain still have the inflationary features, maybe there's a longer lag time before they come out, or maybe the people there's less of a commodity and more people cost in there.

Dustin Jalbert (13:20):

Yeah, I mean some of it, I think it's also just, you think about Mike, the amount of projects that are still under construction right now, you look at, there's obviously a lag time between building a single family home to finishing it, and same thing with a multifamily. And we saw those cycle times really swell during the pandemic just given all the supply chain chaos and whatnot. A lot of that has those lead times and those cycle times are starting to compress again and normalize. But there's still a lot of construction underway both in the single family and multifamily side. So there's a lot of projects that are underway, homes that are being finished. So you think about, like you said, the products that come towards the end of the cycle, the cabinets, the doors, electrical equipment in some cases, appliances. I don't think that they're as inflationary as they were sort of 12 to 18 months ago. So maybe the direction now it's more flattish in terms of direction up, but I think builders are not getting the kind of cost relief that obviously they'd like on those other items. That said, you look at home builder margins, at least the public builders, they seem to be doing okay even with these higher costs, these cost levels, right?

Mike Simonsen (14:37):

Yeah. Well there's a few factories in there that I definitely want to talk about today. You mentioned one that is the sentiment indicator and that demand is kind of suppressed right now. And do you feel like you have particular insight to business cycle like recession risk in 2024? Can we see that in, do we see it earlier in things like that part of the demand, the lumber demand, or do we see it later?

Dustin Jalbert (15:11):

I think the thing right now, Mike, I would say lumber has already gone and wood products broadly has already gone through its recession. So typically the housing market leads the business cycle. And so by kind of transitive property, the same goes for wood products demand. So really we think actually demand kind of bottomed out for at least lumber dimensional lumber probably in Q1 of 2023 and sequentially we're starting to see a bit of re-acceleration. And as you can imagine, some of that is from the single family space we've seen single family starts enter a growth path, and that is a big source of demand, especially there's single family multifamily, but multifamily, the homes are smaller, less wood intensive. It's really the single family side that drives the new construction side from a wood demands perspective outside of repair and remodeling. So in our view, the recession has already happened for wood products typically that would lead the cycle, but this has been such a different business cycle right now.

You look at what the labor market has done, it's been so resilient. So I'd be hesitant to say that the labor market is going to go into recession. Lumber's gone into recession in 2024. That said, I mean just looking at the labor market separately, it does seem like reading the tea leaves, there's some weakness there. I don't think it guarantees a recession. Job growth is slowing. You're seeing continued unemployment claims tick up, aggregate payroll slowing, not disastrous, but kind of those more later cycle signals that you'd see in the labor market that could drive a recession. But I do think we have to kind of separate the wood product side and the labor market and broader economy just because the nature of the pandemic and the cycles that it drove in the goods and the service side of the economy, it really just has created these rolling recessions in different sectors at different times.

Mike Simonsen (17:17):

So that's really interesting. In fact, saying that the wood products went through its recession and through early 2023, January, 2023, does that mean it feels like it's a sort of expansionary part of the economy in 2024?

Dustin Jalbert (17:38):

So we actually think, so we're probably a little bit on the bullish side compared to the market. Like I said, the sentiment indicators that we collect and also just looking at some of the public sentiment indicators that the N-H-B-H-M-I and things like that are pretty depressed right now. But we do think that the worst is behind us from a wood products perspective. And the reason for that is we're seeing rates come down. We, we've had this huge spike in mortgage rates, we're now getting some rate relief, both if you follow the tenure obviously, but then how that translates over into mortgage rates. I think we finally are at the peak of this mortgage rate cycle, and part of that is because the inflation picture looks better. It seems like we've hit peak inflation. There's good signs that inflation is going to normalize without huge damage to the labor market.

And so I think what's happening is obviously the market is pricing in the fact that the Fed can become more dovish, focus on its employment mandate and stave off a major recession next year. So I think if you have this dynamic where they can cut rates and inflation remains under control, I mean that sets up a good dynamic for housing generally both new and resale. And so we do think multifamily is going to be a drag next year just given the amount of floor space coming into the market. But as I mentioned earlier, it's really the single family side that drives wood demand in new construction, three to four times more wood used in a single family home compared to a multifamily home. So that is part of the reason we're bullish. We also do think the repair and modeling side, we are not super bullish on it next year, but we think repair and modeling from a volume standpoint has kind of leveled off here and is starting to normalize after this big binge in sort of home improvement activity we saw during the pandemic. So we think it could be accelerating but at a modest pace next year.

Mike Simonsen (19:44):

So that's really fascinating. That correlates with our view of the resale housing market where as of we're recording this now at the end of November and we can see year over year new contracts improving for the first time earlier in the year, it was with 30% fewer sales every week, and now it's like 5% more each week. So from our view, it's really early in that trend and it doesn't look, it's not strong, but it feels like, huh, on our view, home sale transactions could be up, look like they will be up in 2024, a little expansionary. And it's fascinating that you're seeing the same signals on the lumber side.

Dustin Jalbert (20:37):

Yeah, I mean do think it does feel like the lead time from the housing, when housing goes through its downturn to whenever the broader cycle downturn is, it feels like this cycle potentially it's very, very stretched out. So if it's even connected, it normally is, right? It's been such a weird business cycle because of the nature of the pandemic and this sort of boom and bust of goods to services and vice versa. But you could have a dynamic next year where housing broadly is an expansion, whether you're talking new construction, single family in particular, maybe not so much multifamily, but single family, the resale side of the market is in recovery, but maybe we do have a very mild recession if the labor market is cooling. But for all the reasons you've talked about on the weekly market updates, if we have this resale supply that's coming into the market and enables more transactions and rates come down, it feels like that's the consensus rates are going to come down and that should drive demand higher. And I would imagine that's going to drive resale inventory higher too. Every buyer is a seller or most buyers are sellers. So I mean it could be a very interesting dynamic next year for sure in housing.

Mike Simonsen (21:56):

That's really, that is a great insight. I'm happy to hear it because I encourage my guests to help us view the future, what framework can we see the future in and what do you use? And so I really appreciate that. So that's the recession indicator side. We talked a little bit about inflation, but what do we know? And we talked about prices, I think you said 300 bucks for whatever the unit is, up to 1500 at that peak of that inflation. Those were, and then we're about 400 now. So where do you see lumber prices in the next year? Do they pick up if we're an expansionary space?

Dustin Jalbert (22:53):

Yeah, I think so. But I think the thing that we tell our clients is that it will go up probably next year, but we have to understand that the covid paradigm for prices is behind us. And I think, I think a lot of people took from that pandemic initially was that we had this paradigm shift in housing and it's translating into a whole different market view on what products demand. And really at its most fundamental level, what happened during the pandemic, you had a positive demand shock from all the reasons, the pivot to the good side of the economy, fiscal stimulus, lower interest rates, people refinancing their homes, all these demand drivers that typically would drive housing expansion, both in the resale but the new construction side and remodeling side. And then you had negative supply shocks because of all the things that we've heard talked about between transportation issues, labor shocks, a lot of the sawmills actually curtailed production at the outset of the pandemic.

They thought there was going to be a massive recession, and obviously the opposite happened. We had a huge surge in demand. So that took 12 months for just the supply chain starting from the beginning of covid of the pandemic to normalize. So the way we characterize it is, look, prices are probably going up maybe five to 10% next year on dimensional lumber because we talked about we think demand will be up and the supply side won't be able to keep quite the pace. But I think the level of volatility we saw during the pandemic, it's important to recognize that was sort of a black swan event that was a one in a hundred year, maybe 50 year kind of event where that kind of volatility is not going to be replicated. So we think the industry demand is points up. So we do think prices point up, but the pricing action is also going to be capped because there's a lot of sawmill capacity that's underutilized right now. There's a lot of mills curtailing. There's also supply from offshore. So think about the lumber market. Most of our supply comes from the US and you think about the US market, but then about 25 to 30% comes from Canada, and then another 5% or so comes from what we call offshore. So basically outside of the US and Canada. So we think there's still ample supply that's going to keep a lid on big bumps in prices going forward.

Mike Simonsen (25:25):

There's a lot of the things I want to get into there, and that was really a terrific view. So a little bit of price and inflation on costs, but it's notable that the capacity that the market is under capacity, under capacity right now, which implies that not too much pressure, certainly not the covid supply chain pressure. Do I have that right?

Dustin Jalbert (25:48):

Yeah, there's more. There's excess capacity in the market right now. So the mill utilization rates are kind of low right now compared to history. When we forecast, we look at mill operating rates and utilization to help price forecast where we're at right now. It's probably points up the direction on prices, but it's still going to be a trickle up as opposed to a big acceleration of,

Mike Simonsen (26:19):

Okay, that makes a lot of sense to me. Tell me a bit about the Canadian, the international relationship on the market. I read somewhere about tariffs, and it's funny right now both Biden and Trump are big tariff people. They want to tax X, and so what does that mean for lumber?

Dustin Jalbert (26:46):

Yeah, no, it's a good question. Mean that's interesting, Mike. I think the US and Canada generally have good relationships as neighboring economies and a lot of sort of country trade that happens, but lumber has been this weird sort of negative point in that relationship and actually disputes over timber. So the timber that's grown in the forest as well as lumber have been going back, that goes as far back as the 18 hundreds. There were border disputes again in my home state of Maine between the US and Canada over the border of the state of Maine. And a lot of that dispute was over timber rights because back then that was a big sort of commodity in terms of just in terms of the value and sort of a driver of the regional economies, really the dispute you're talking about the software lumber dispute between the US and Canada, really, I guess you could say it was formalized in the early 1980s with the US basically accusing the Canadian producers again who are a big supplier of lumber in the US market.

Back then, I think the share was higher today. It's again, US lumber consumption Canada accounts for dimensional lumbers, 25 to 30%, I think it was higher back then, but the US industry basically accused the Canadian industry of subsidies on their logs. So just not to get too much into the minutia, but the timber in Canada, a lot of it is on federal lands, what they call crown land. And so the government basically administers the system and the pricing system for that timber. So there was an accusation basically that the timber is subsidized, and so that qualifies it for countervailing duties. And then also that lumber at times when the market was weak, was being dumped into the US market. So basically below competitive fair value, and I'm not a lawyer by training, there's very strict distinct definitions of all this in terms of international trade law, I would have to go kind of crack open the textbook on all this.

But anyway, those accusations led to sort of multiple iterations of a lumber agreement between the US and Canada. That's happened in three or four different versions of basically a managed trade system where there's either quotas or trigger tariff prices on prices on volumes of Canadian lumber coming into the US market. So there's always been this added tax essentially on Canadian lumber. Right now we are at a stage where there's actually no outstanding agreement between the two parties. So what is happening is the US Department of Commerce every year is basically assessing a new countervailing and anti-dumping duty rate on Canadian lumber. Right now it's at a combined rate of the anti-dumping and countervailing duties of about 8%. So that is kind of the tax that Canadian producers have to shill out to the Department of Commerce to ship lumber to the US market, which as you can imagine for Canada, the US is by and far the largest market for lumber.

So they kind of are at the whim of the US industry here. I know that's probably maybe going a little bit into the minutia there, but hopefully that gives some color in terms of where this stands. And just I think the last thing I would add that the administrative process for applying duties is different than tariffs. Tariffs. There are, and again, I'm not a lawyer trade lawyers, so there's probably people who are going to listen to this or are going to realize I misquote this a bit, but there are conditions where tariffs say the executive branch for emergency or national security purposes can impose them on for a variety of reasons. Duties are different in that the process is a very legal, strict process that has to be adhered to and is dealt with by the Department of commerce. So for example, Joe Biden can't step in and say we're going to cut lumber duties to zero to try to drive home affordability. That is just not a mechanism that's in place. What has to happen, ultimately there has to be an agreement between the US and Canadian industry. And really the only time that really happens is when the market is really under a lot of stress and it kind of drives people to the table to have an agreement to move forward. So again, I knew that was a long answer, but hopefully that was helpful. So

Mike Simonsen (31:36):

Well, that got to exactly my question, which is we have an affordability crisis in the US and in fact in Canada too, and is there a lever in taxes that impacts that? And it sounds like there actually isn't a lever, at least not an easy lever that we could go like here, let's go cut 8% out of our cost of our home building.

Dustin Jalbert (32:07):

And like I said earlier, you do the math, the framing side is not a huge piece of construction costs, but the labor and the materials for framing for construction costs for a typical single family home that's around 20% of the construction costs. So let's say half of that is labor. Let's say the framing is about 10%, give or take, that's not nothing if you can take 8% off, but is it ultimately going to drive the affordability of a home given how out of whack we are in the market right now and everything else that goes into the cost of the home, the labor, the land costs as the land costs, a lot of that is driven by zoning issues and sort of permitting costs. I mean, it's talked a lot about how if we reduce lumber costs, we could drive affordability in housing. But I think it's such a small piece of the puzzle. There's just other bigger fish to fry if we really want to solve this problem, in my opinion.

Mike Simonsen (33:14):

Okay, that's great. I now have knowledge there that I won't be spouting off about that part as a solution, so that's great. But while we're talking about affordability, affordability really is a function of supply and demand. And so if we talk about one of the things that the most people in the housing data world assume that part of our affordability crisis in 2023 is still a hangover from the great financial crisis where we underbuilt homes for a decade of that view that we underbuilt homes for a decade. My question to you is, but not everyone is of that view. And so my question to you is how do you think about construction over the last decade and can you see it in the lumber data and do you have insights in the lumber data? And then how do we look at the next few years about home construction and what can we already see either in the data or in maybe other trends, maybe it's regulatory or other commercial trends that you see? Are they expansionary for home building or are they still being restricted? Let's start with what you saw in the last decade.

Dustin Jalbert (34:53):

Yeah, I mean, our team generally part of our analysis when we do a forecast, we do a lot of short and medium term forecasting, so 12 to 18 months out. So a lot of that is more kind of underlying short-term trends with interest rates and affordability that typically drive housing demand. But over the long-term, we look at demographics, we look at the census data, the census has, they actually just released their latest forecast for demographics, and it was severely downgraded compared to I think the last release was in 2017 and other kind of data sources. So when you look at that, there's clearly been kind of a pent up demand element to housing. Even if you just look at vacancy rates, if you look at vacancy rates reported by the census, you back out what it would take to have a sort of normalized vacancy rate compared to the very low levels.

Right? Now, that alone implies, let's call it a million and a half to 2 million unit shortage, and that's at a national level. As you know, Mike housing is local. So we start digging down to the local level and sort of build it up from a bottom up perspective, you could probably get to a different, different conclusion because again, housing in one region is not portable to another region. It's not like a commodity that can kind of shift and if the transportation costs sort of allow it. So I think in our view, there is a shortage, and I think there's underlying demand over the next couple of years in terms of household formations of maybe 1.112 million household formations. And then the math on top of that, there's usually 200 to 300,000 units of net loss in the shelter market, in the shelter stock. So it's homes that are destroyed in natural disasters are dilapidated or removed because of infills, things like that. So that underlying demand alone just annually is you're talking 1.4 to 1.6 million units, and then there's that 2 million units of shortage. So there's a need to build to meet that demand. And then to your next point, if I recall the trends that we're seeing in terms of improving affordability and getting more shelter into the market,

Mike Simonsen (37:26):

So if we eat up some of that backlog and we build more houses, and is that likely to happen? Are we going to build more? Are we going to get ahead of the curve?

Dustin Jalbert (37:36):

So we are probably a little bit bearish on this, unfortunately, structurally speaking, we think even if we can deal with, there's a lot of issues on the zoning side, so let's take multifamily actually, I think there's reason for optimism there. There's a lot of upzoning measures at the municipal level that has happened to get duplexes and triplexes and lot minimums and parking minimums removed. I think there's actually some optimism on the rental side of the market on the multifamily side that we're going to gain some momentum in construction and improve affordability. So I think those measures, I think make me a little bit more optimistic on the single family side. And our team is not really super optimistic. And I think when you look at it, there's just a speed limit that we can build housing in this country. And I think a couple things, and you saw this during the pandemic, we saw housing starts shoot up to, I forget where we peaked out 1.6, 1.7 million units in terms of starts and big jumps in the single family side in particular.

But I mean completions, were not able to jump to that rate. And a lot of that has to do with all these bottlenecks downstream. And some of that is in terms of the actual product and commodities that go into housing, the building materials, there are capacity constraints to meet that demand and build that out. But I think even more critically is the labor. We don't have that kind of surge capacity in terms of skilled labor. And that is a piece, and particularly on the single family side, right? Single family is notorious for being extremely unproductive from a labor perspective. It's just very difficult. Framing is framing, roofing. All these are skilled traits, and you think about that in the context of some of the biggest building markets that are dependent on immigrant labor. You talk about Texas, you talk about California, 40 to 50% of the labor force in construction are non-residents constrained the supply of immigrants in this country, and that is going to constrain our ability to build shelter.

So I think there's optimism on the multifamily side, but I think single family, I think really the affordability solution is at least the quick affordability solution. If you want to talk longer term, there's probably other things we can do. But the tomorrow solution is to build smaller homes and we would have to have some sort of miraculous agreement on maybe some sort of immigration policy work, temporary work visas, things like that to get skilled construction trades in this country to ramp up our construction. But I think last thing I'll say, if you look on the single family side, if you look at the pace of completions, not starts kind of the trend, I think that's the underlying speed limit that we can build single family homes in this country. Let's say it's an extra 50,000 to a hundred thousand units a year on top of the million units that we're kind of pacing at right now, give or take. So that's the speed limit,

Mike Simonsen (40:56):

Right? That is really insightful. So let's start there. So the pace of completions is, look, we're doing about a million right now per year, and we could maybe pick it up 10%, but we need to pick it up 50%, right

Dustin Jalbert (41:16):

To deal with this, not only the existing shelter demand. So again, let's call it annual demand of 1.4, 1.6 million units. We can debate, people debate this all the time, what the underlying demand levels, but it's even if you say 1.3 to 1.6, but if you're at that rate and then dealing with the whatever, one to two to 3 million of pent up demand, whatever that number is, we really should be building 1.6, 1.7, 1.8 over the next decade to address the affordability issues. And even then, I'm not even sure, I personally, this is not necessarily a fast markets view, this is more my own personal opinion. I'm not even sure. Then you're going to deal with the affordability issues just given the nature, especially on the single family side. Think about it. No one wants their home price to go down, who's a homeowner. There's this natural tension economically and politically given there's whatever, 120, 130 million households, a lot of them owned their own home. There's a natural political tension there to prevent the housing market from having whatever a five, 10% drop in value that is driven by, that's policy driven.

Mike Simonsen (42:29):

So I agree with you there, and I think that's also true on the immigration side. I'm an immigration maximalist, and that is politically a very rare person to be in this country. And so it's hard to see how we are going to solve this capacity problem, this construction capacity problem. And I love that the pace of completions is the number to pay attention to and is probably speed limited for us. And that is because people cite the starts all the time and starts are lots, empty lots, but really the pace of completions is what we have at the thing to note. And when we get ahead of that, we get delays, which is what we got during the pandemic.

Dustin Jalbert (43:14):

Yeah, yeah, I mean, that was just, and again, granted, I do think obviously the circumstances in the pandemic really kind of turned the dial to 11 or 12 on those issues, but I think you're even seeing it still today. There's just a natural sort of speed limit and there's too many bottlenecks. It's not necessarily on the framing side, it's getting electricians and plumbers and permitting issues. And right now you can't get utility poles, so to get to wire the house if cabinets are still an issue. So we're kind of well through a lot of the supply chain stuff, and we're still having these challenges. I think the good news is when you have these big surges in demand, the supply side does tend to respond. I am a textbook economics believer there is prices do send signals downstream in the market. It can take time for supply to respond.

But I do think at least on the building material side, you have seen, we see it on the wood product side, we've seen capacity expansion. Now, we might have too much, at least in the short term, we might have too much capacity. But I think long-term will lead to capacity. And I think you're seeing this in other segments that the window is the cabinets. People saw this demand and made some business decisions, say, well, we should expand our production at our facilities. So I think there's some room for optimism. Maybe I'm a little bit too pessimistic on the single family side. I just don't think we've done anything to solve the labor issue that is still the binding constraint.

Mike Simonsen (44:55):

That's a very clear, and I am perfectly happy to hear your personal opinions, not just the fast market opinions as well. I love it. That's really, really useful to me in my thinking here. So we've been talking about the long-term demographic shifts, and I think you mentioned about how recently the census forecast about population growth in this country. The recent forecasts have come way down, and I think that's because we continue to restrict immigration and we don't let people into the country anymore. So the forecast of population growth in the US has come way down, and does that change that one and a half, 1.6 million need? Do we just restrict immigration and let the existing people catch ourselves up?

Dustin Jalbert (45:54):

I will say this, Mike, there is, and admittedly I haven't delved super, super deeply into the data, but I think actually the census forecast, the source of growth, the single source of growth actually in the population is immigration. It's actually where they've become very pessimistic is birth rates and death rates of the domestic population, which that's a whole other discussion in terms of just, obviously a lot of this has been magnified by the pandemic. We had a huge spike in mortality rates across all the spectrums, but especially I think the elderly side of the population. But there's just been a lot of longer term, and again, this is, again, I'm talking about something that's way outside of my expertise here, but there's just a lot of health crises that we've had in this country in terms of mental health. Suicide rates are up, especially among men. So that's a source of mortality. That's obviously unfortunate, but also you've just seen the average age of the Americans has been dropping for I think several years now. So that is a part of the equation. And again, I'm not a census statistician, so I don't know all the details in terms of how they go through this, but I think it's actually, they're quite bearish on the domestic population circumstances. Immigration is slowing, don't get me wrong. So that is a source of slowdown, but it actually is still growing in the outlook.

Mike Simonsen (47:28):

It's still the one source of growth because we're having fewer babies and we're dying faster,

Dustin Jalbert (47:32):

Which is obviously super morbid and sad. But that's sort of part of the dynamics. In terms of the second part of your question about what the long-term shelter need is in terms of the next decade, maybe we need that 1.5, 1.6 million starts to deal with the pent up demand issue or under construction from the global financial crisis. We do think once you get past 2030, the population dynamics do start to look, I don't want to say dire, but the picture for the housing market looks much different. And so we probably don't need to be building 1.5, 1.6, 1.7 million homes. It's probably closer to, you're probably talking closer to a million to 1.2 million homes. There's still a natural level of replacement that needs to happen in the shelter stock for a variety of reasons. Homes become sort of vacant. People move to different geographies. So I think this is actually a critical question about what the housing outlook looks over beyond, let's say the next decade.

If there's this still a mass migration, let's say from the Northeast and the Midwest to the south into the mountain states, whatever you want to call it, whatever the trend is, then that mitigates some of the impact, because again, the house isn't portable from the Midwest to Florida. You still need to build a home there. So if there's still this longer term sort of migration trends that could kind of mitigate the population slowdown to some degree. So I mean, the population slowdown is sort of baked to some degree. We know that's happening. That's all mature economies. The population growth just slows and slows and slows, and the replacement rate drops to a point where you're no longer growing. So I mean, think that's a safe assumption, but I think to next assume that we're just going to have a glut of shelter, like a system like Japan or Italy or some of these places where you can get a house super, super cheap. I don't know that we actually know the answer to that a hundred percent. I think you can make some educated guesses, but I think that that migration story and what the shelter stock is in those migration locations is a huge question. If we continue to have the trends that we're seeing now, that kind of mitigates some of the diminished population growth, because again, that house in the Midwest doesn't meet demand for shelter in the Sunbelt.

Mike Simonsen (50:13):

Yeah, yeah. Okay. So that's excellent insight too. So the thinking about the migration means that we may have our replacement need goes up as even though the population maybe flattens or declines, that is a terrific way to think about it. You mentioned a couple minutes ago, and I want to make sure I get this right, the utility poles are in short supply right now. Is that true? Is that a thing?

Dustin Jalbert (50:50):

Yeah, I mean, so a lot of the supply chain stuff that you hear about has been certainly, for example, my expertise is on the framing and wood product side. I would say building materials more broadly, the framing side, a lot of that has been sorted out. Things like engineered wood products. You heard issues with LVL beams and eye joists, and those things that were in short supply have been solved a lot, even windows and doors, and you still hear issues with cabinets. But the thing that you continue to hear in surveys that say like John Burns real estate or Zonda or some of these other real estate consulting firms that do these surveys, it's the utility poles to actually connect the house to the grid. And so obviously if the house doesn't have power, it can't be moved into, and also I guess you can have generators on site to do construction.

So that's not as much an issue, but it's really like that's part of this cycle time staying extended for some of these homes. They literally can't get them to the client. If it's a custom home, for example, and they've already purchased it, or even if it's a spec home and it's been purchased before, it's been finished, that's an issue. We don't even have enough utility poles. And I think some of this, and this is out of my range of knowledge here, but I think some of that probably has to do with just all the demand that's coming from all the electrification initiatives that we're seeing across the country. There's just so much demand for electrical equipment. And so the backlogs there are probably still an issue. So some of this boom and what do you call it, the clean economy and non residential construction, battery facilities and manufacturing facilities. I mean, that's to some extent competing with the residential construction space. But yeah, that's one that it's still an issue right now. That's

Mike Simonsen (52:52):

Fascinating. Okay. Utility poles, that's great. It actually, it kind of gets to the last topic that I want to make sure, see if you can help me fill in my universe of knowledge in the lumber world. And the question is I have is about sustainability. Is our process, do we have a sustainable process? Is that changing? Does it matter? Tell me about what I should know about lumber sustainability for our sticks houses.

Dustin Jalbert (53:21):

Yeah, yeah, it's a good question because the vast majority homes we build in this country are stick framed, at least for a single family. Even multifamily too. A huge percentage of them are stick framed. Look, lumber and timber is a renewable resource. I think the industry, I think has come a long way in terms of you have a lot of, there's FSC certifications and SFI certifications in terms of the sourcing of the material that it's done in a sustainable sort of way. So the industry, I think over the years has made efforts to make sure that the material has a green story. I think the kind of interesting twist, but just to complete that thought, there's always been concerns about environmental sustainability with clear cutting and disruptions of habitat for different species. Actually, that was a huge issue in the nineties. There was something called the spotted owl crisis in, so yeah, you may know about this.

I remember it was in Oregon, right? Yeah. So this was a huge issue in terms of, because a lot out west in the US, a lot of the timber is on state and federal lands in terms of where it's sourced, which is different than the south, south. It's mostly private owners. But the federal government basically came in and said, look, you can't be cutting this timber because there's this spotted owl that's highly endangered, and it actually had a material impact on the industry. There were lots of mill closures because the logging was severely curtailed. So anyway, sorry, I digressed that. That was just a side thought that I thought in terms of the sustainability issue that kind of came to mind. But the other angle right now is that where I do think lumber and the timber industry is starting to catch on and starting to move aggressively towards is carbon capture.

Growing trees, you are literally sequestering carbon. So there's a whole effort to try to build out carbon markets and say, look, if you have a timber cycle, yes, you're cutting the timber, but if you're replanting and you have all that sort of replanted timber is absorbing carbon, you have a net effect there where you actually are canceling out some of the emissions that the industry is producing from logging and trucking, and also just the loss of the carbon absorption for those trees that were cut. So I do think there's, especially, everything is relative, especially when you think about in the context of other building materials like steel concrete, which have probably not as good, they don't have as good sort of carbon footprint ratings. And you're even seeing those industries move. You hear about green steel with some of the production technology and steel to try to minimize the carbon footprint. So I do think that there's this whole green economy carbon element that it's a good thing. It's going to drive an initiative to try to make greener more sustainable building materials. So that I think is also an interesting angle to think about.

Mike Simonsen (56:38):

Yeah. Okay. So most of the wood products we're using in homes right now, are they farmed? Are they planted or are they still

Dustin Jalbert (56:47):

It depends. So it depends. So I would say generally speaking, in North America, the majority are kind of virgin natural forests, right? But there is a shift in the industry to move to the US South where the south uses, so a lot of the lumber that we use, it's kind of fur or spruce in the Pacific Northwest or from Canada. And that material makes great framing material. It's kind of the more northern, colder climates. The trees grow slower, the poles are nice and straight, you get nice tight rings on the logs. So that makes a really strong studs and other building kind of higher graded lumber. So we use a lot of that. But the industry is moving south because really the material, it grows faster. The southern yellow pine grows faster, and in that case, in the south, most of that is more like a row crop.

It is a rotational crop that is not in these virgin forests that are kind of natural sort of forests that are being logged. So you could argue that more and more of the industry as it's moving south is kind of moving to this sort of crop rotation sort of model, which again, you could probably argue that that is a more sustainable form of logging. But I think the way that they do it, even out in the Pacific Northwest in Canada, I mean, it's not like they're, and not replanting or anything like that. So I think it's just important to kind of keep that in mind, but that's just a little bit of a detail there. Yeah,

Mike Simonsen (58:25):

That's good to know. And I think that there's probably a lot to be said about the carbon capture, especially if we're doing a replanting of those and reforesting areas and keeping them. That's an excellent view. Okay, look, we powered through an hour of conversation already. It's great. It's exactly what I wanted to understand about lumber and the impact on housing and what you see that maybe the rest of us don't yet see for the world. That's exactly what we try to accomplish with the podcast. So Dustin Jalbert, where can the listeners find you? You and I are Twitter friends, but you publish, you talk on Twitter, and where else do we go look?

Dustin Jalbert (59:10):

Yeah, so again, on Twitter you can find me at two by forecaster. So that's my handle. So I'm a pretty active user on Twitter or X, whatever we're calling it now. But you can find me there. I'll leave my work email too. If folks who are listening want to contact me, you can contact me at email me at d And also generally about our company Fast Markets. If you just type in Fast Markets one word into your search engine, you'll find us pretty quick and learn a little bit about our price reporting business and the market research that we do.

Mike Simonsen (59:47):

Excellent. So Fast Markets. Dustin, Bert, thank you so much for your time. That was exactly what we wanted to accomplish.

Dustin Jalbert (59:55):

That was my pleasure, Mike. It's great to be here.

Mike Simonsen (59:58):

Thanks for listening to Top of Mind. If you enjoyed the show, I'd really appreciate leaving a nice review on your favorite podcast app that helps other people find us as well. Be sure to subscribe so you don't miss future episodes

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