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A key factor in Real Estate is new home sales. Sales of new homes rose 17.5percent in December, according to the New Residential Sales Report from the Census Bureau. At the same time, there were approximately 191,000 new homes for sale, which is the lowest since February of 1968. While lumber prices have increased substantially in the last few months, they are off from recent highs. Lumber prices should continue to go higher as domestic homebuilding and global demand picks up.

Several forces are converging that should increase new home sales. Economists generally agree that annual demand for new housing units is somewhere around 1.6 million. Some economists say that 2 million units are needed annually, while others think that the actual demand is below 1.6 million. Here’s part of how they come up with these numbers. The primary drivers of housing unit demand are new household formation and housing unit destruction. We regularly hear that new households, on average, form at a rate of 850,000 annually. Our population continues to grow at a rate of about 3 million people per year. In 1990, there were over 4 million live births in the US. Those young adults (along with those born in subsequent years) should be forming new households soon. Currently, new household formation should be between 750,000 - 1,000,000, yet young people still choose to live with parents or live together in groups. This “pent-up” demand should be a major force, as young people begin to start new households at an increasing rate. Another factor is that homes are destroyed by fire, flood, storms and urban renewal, and many have not been being replaced. During a single storm, Hurricane Katrina in 2005, roughly 340,000 homes were destroyed. Fire, flood and storms are constantly destroying more US Homes every year.

About 5 million “used” or existing homes are currently for sale, and as owners sell those units, they will need to move into another housing unit. Most of the houses for sale are currently occupied by owners and renters that wish to move to a different location, or into a larger or smaller housing unit. This “musical chairs” of houses requires many empty houses, since a buyer cannot simultaneously buy and sell a house and make an instant move. Foreclosures can fill a part of the need, but not everyone wants to live in a foreclosure. New homes typically fill a part of this need, but there is not much selection there.

It wouldn’t take much to “soak up” all of the available new homes. Also, as employment picks up (which it seems to be slowly doing), fewer homes will be lost to foreclosure and most of those who lost their homes to foreclosure will want to move back into a home. There have been a large number of lumber mills that have shut down, many have been dismantled or converted to another use, and those that are left have tried to cut their losses by running at a lower capacity. Building material wholesalers and distribution yards have also closed, and those that remain have drastically reduced their inventory. New building material supply facilities will have to be opened when demand picks up. Credit facilities for these crucial components of the distribution chain have been reduced, severely constricting their ability to buy inventory. I estimate that 4/5ths of the building material supply houses have closed, so there is no inventory buffer at that level. As demand for new homes domestically and globally picks up, lumber prices will move up.

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