Talk casually to anyone about the US housing market, and you're likely to get a good volley of the latest reasons why it is never coming back. Data have been so weak for so long that it's not hard to become convinced that this is just part of a 'new normal' of lower activity. But something is stirring in the market: housing starts jumped 11 per cent in the latter half of 2011 from the average level in the preceding 30 months. Is the market telling us something?

We believe so. But whether it is or not, is there reason to believe that at some point in time, the market is destined for a sustained higher level of activity? Two key points suggest so. First, the housing surplus is now shrinking by a million units a quarter; if this keeps up, the market could be nearly balanced by year-end. Second, current activity is well below normal. US population data indicate that net annual household formation – the basic number of new units needed - is 1.4 million. Even with recent growth, current starts are only 660,000. There is still a lot of room to grow.

Recent growth in starts has not yet helped Canadian wood exports to the US. But for an industry that fell 29 per cent in the recession and remained slow, holding the line is okay. What if the market were to stage a real revival? Suppose the US market only made it back to 1 million units. From current levels, that would still represent growth of 57 per cent. Based on past activity, exports of wood products from lumber to OSB to more specialized products would be in for a whopping 70 per cent increase. Even if spread over a few years, this would be very respectable annual growth.

Are there any threats to this rosy picture? One key difference between now and past activity is the currency. In the last growth cycle it averaged US $0.76. Now, it is expected to be stuck in the upper-90-cent level indefinitely. Granted, this is a lot higher, but it is not a show-stopper. Loonie appreciation began in 2003, but wood product shipments remained strong until US housing started to fold in 2006. Also, if history repeats itself and growth surges sharply, markets will likely accept price increases.

US markets will also face competition elsewhere. Like many other exports, shipments of Canada’s wood products have been diversifying in recent years. British Columbia has seen entire wood processing facilities reopen solely to accommodate exports to China. Growth to China has averaged 41 per cent annually, and growth to other emerging markets is also impressive, at 19 per cent per year – taking total shipments from 1 per cent of the total to 12.6 per cent in just 10 years. With established markets elsewhere, the industry may well be unable to keep up with rising US orders.

An additional supply constraint is the amount of exit that the industry experienced in the recession. According to Statistics Canada, the wood product manufacturing industry experienced a 28 per cent drop in the total number of business establishments between 2005 and 2009. Good times will likely bring new or mothballed operations into production, but with a delay that could constrain product flow.

The bottom line?

There’s no shortage of wood in Canada, but when the US housing market begins its comeback, there may initially be a significant shortage of sawmill capacity to produce it. Plant capacity in Canada is one issue, and labour constraints are another. This is yet another industry whose biggest problem in the coming months may well be simply keeping pace with incoming orders.

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