January 26, 2022
Forest Products
What's next for repair & remodel demand?
Our view: After a wild ride since the onset of the COVID-19 pandemic, we expect growth in the repair & remodel market to stabilize. However, our outlook remains positive as we see several tailwinds including an aging US housing stock, limited supply of new homes, and the increasing concern of extreme weather events. We also see increasing home equity values as a positive as homeowners continue to see renovation projects as ROI positive, allowing them to justify the cost. We currently forecast a 4% y/ y increase in home improvement demand for lumber, and a 2% y/y increase in home improvement demand for OSB.
Lumber and OSB operating rates are sensitive to changes in repair & remodel growth – We found that 2022 estimated lumber and OSB operating rates varied significantly depending on growth in the repair & remodel market, with lumber being ~40% more sensitive to changes. For lumber, we found that operating rates could vary by ~5.5% in 2022; we find that for every 2.5% change in expected demand, lumber operating rates change by 0.7% keeping US housing starts flat. For OSB, we found that operating rates could vary by ~4.1% in 2022; we found that for every 2.5% change in expected OSB demand, OSB operating rates change by 0.5%.
Repair & remodel activity is the primary driver of lumber demand – Home improvement spending accounts for 40% of lumber demand as of 2021, compared to only 29% in 2005. Although new-home construction has steadily increased its percentage use of lumber consumption since 2011, this is due to severe under-building between 2007 and 2019 rather than being caused by a preference to invest in new homes. The aging US housing stock, limited supply of new homes, and the increasing concern of extreme weather events should all act as catalysts for the sector moving forward.
Repair & remodel activity remains linked to several macro factors – We found that inflationary environments are not necessarily negative for the home improvement market. We observed that periods of change inflation are followed by similar year-over-year changes in repair & remodeling conditions. We also found that increasing home equity values are a strong catalyst for home improvement spending as this allows homeowners to justify projects on an ROI basis. Additionally, we observed that periods following US recessions have seen the most significant increases in repair & remodel spending as these periods often coincide with lower interest rates which are also a catalyst for home improvement activity.
Repair & remodel activity can be a leading indicator of lumber and OSB price changes – We observed that the pattern of change in repair & remodel activity can be used as a leading indicator of changes in the price of lumber and OSB. Given that repair & remodel demand accounts for ~40% of lumber use, we do not find this relationship to be surprising. We find that consumers will quickly stop spending on home improvements after rapid price increases, which illustrates the elasticity of demand for lumber.
We expect home improvement wood product demand will continue to move higher in 2022 – Despite cost inflation and supply chain challenges acting as headwinds in the short term for the sector, we expect that homeowners will continue to invest in projects due to the increased equity in their homes following the rapid price appreciation we have seen since the onset of the COVID-19 pandemic. Although the outlook may not be as overwhelmingly positive as it was heading into 2021, we feel that conditions remain well above historical norms and expect the market to grow quicker in 2022 than the 3.2% CAGR we have seen since 2010