Photo: smereka, Depositphotos

The Canadian Thanksgiving long weekend brought a not-surprising further drop in prices of most benchmark construction framing dimension softwood lumber commodities, as the days got increasingly shorter and the weather turned ever more winter-like. Demand across North America was almost entirely for small fill-in orders, while sawmills were preoccupied with locating shipments long-ago sent to customers but still not arrived, according to Madison’s Lumber Reporter.

The big question on the mind of industry players is, “Where is the price bottom and when will that arrive?” No one yet knows the answer for this, except to say it will be much higher and much later than in usual years. The latest lumber production and sawmill capacity utilization rates data release from the Western Wood Products Association — for July — shows a marked downturn in Canada. In the US, softwood lumber production continued to recover. The all-important wood manufacturing volumes in Canada took a significant tumble downward in July 2020, after recovering nicely in May and June from terrible lows of April. This decrease in lumber available for sale after the supply constraints earlier in the year well explains why prices remained so high even until now.

Prices continued to crash down in the Eastern S-P-F market last week. A large contingent of buyers participated, but the focus was on Less-Than-Truckload orders from the distribution network at wildly varying – but resoundingly lower – numbers. Overall sales volumes were strong but individual orders remained small as customers refused to take long positions in a falling market. Prompt wood became more common with each passing day as sawmills began to run into order files on a number of items, while production of bread and butter items were booked at around two weeks.

For the week ending October 9, 2020 the price of Eastern softwood lumber commodity item Eastern S-P-F KD 2×4 #2&Btr dropped once more, to land at US$920 mfbm, said Madison’s Lumber Reporter. This price is now -$85, or -8%, less than it was one month ago. Compared to one year ago, this price is up a remarkable +$465, or +102%.

Compared to one-year-ago, last week’s Eastern S-P-F KD 2×4 #2&Btr price was +$343, or +59%, higher than the 1-year rolling average price of US$577 mfbm and was up +$416, or +83%, compared to the 2-year rolling average price of US$504 mfbm.

The below table is a comparison of recent highs, in June 2018, and current October 2020 benchmark dimension Softwood Lumber 2×4 prices compared to historical highs of 2004/05 and compared to recent lows of September 2015:

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Chinese investors have been the biggest purchasers of U.S. residential real estate for six consecutive years, but President Trump’s trade war, and China’s efforts to reduce its national debt and boost economic growth, could change that.

And if the impasse continues, the effects could be even more far-reaching. “The Chinese government could place stricter capital controls about taking money out of China and buying in America,” said Lawrence Yun, chief economist at the National Association of Realtors. China’s government has already put pressure on Chinese nationals to reduce their commercial real-estate investments.Meanwhile, the U.S.-China trade dispute has sent the Chinese yuanUSDCNH, -0.0029%to new lows relative to the dollar. “It’s already making U.S. real estate more expensive” for Chinese buyers, said Michael Fratantoni, chief economist at the Mortgage Bankers Association.

The trade war also adds to U.S. economic uncertainty at a time when real-estate demand is weakening even in some of the country’s hottest housing markets.

China has become the largest foreign buyer of U.S. residential real estate

In 2014, China supplanted Canada as the source of the largest share of foreign buyers of U.S. residential real estate, according to data from the National Association of Realtors.

In 2018 dollars, Chinese buyers accounted for roughly 25% of total foreign investment in U.S. residential real estate. Canada was No. 2 at 9%.

Of the 284,000 properties sold to foreign buyers last year, some 40,400, or 15%, were bought by Chinese nationals. Five years earlier, Chinese nationals had purchased 23,075 homes, representing just 12% of all properties sold to foreign buyers.

Even China’s growing share in recent years represents a small percentage of overall investment in U.S. residential real estate. As of 2018, foreign buyers in aggregate accounted for just 3% of U.S. home sales, the association added. That figure had been rising, but experienced a modest decline between 2017 and 2018. The figures for 2019 are expected to be similar to the 2018 levels.Long before the current trade dispute, the Chinese government had been creating hurdles for its citizens who wanted to invest abroad. The country started restricting outbound investments in 2016, allowing residents to take only the equivalent of $50,000 out of the country, as a means of propping up the country’s currency. This not only made it more difficult to purchase real estate in America but prompted some Chinese investors to sell their U.S. assets.

A Chinese pullback could have serious effects for some West Coast markets

Unlike foreign buyers from other countries who spread their investments more evenly across the U.S., Chinese residential real-estate investment is highly concentrated on the Pacific Coast. Nearly 40% of Chinese buyers have purchased in California, home to a large Asian community.

But California isn’t the only place where a fall in Chinese buyers would make a difference. Chinese nationals represent a significant share of the foreign buyers of residential real estate in the New York City metropolitan area and growing shares of buyers in states including Florida and Texas.

Chinese buyers also play a big role in the residential-real-estate markets of college towns, as more Chinese students have opted to study at American universities, Yun said.

However, a retreat by Chinese buyers could be good news for Americans looking to purchase a home, especially in such costly Golden State markets as San Francisco, Los Angeles and San Diego. These are among the most expensive in the entire country, and their popularity had contributed to double-digit home-price appreciation in recent years.

The rate at which home prices are climbing has recently slowed as buyers have struggled with affordability. The lack of competition from foreign buyers, who typically enter competitive all-cash offers, could provide an opportunity to get a better deal on a home for locals looking to buy.

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Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS^®), showing mortgage rates mixed and largely unchanged from the previous week.

News Facts

• 30-year fixed-rate mortgage (FRM) averaged 3.71 percent with an average 0.5 point for the week ending March 31, 2016, unchanged from last week. A year ago at this time, the 30-year FRM averaged 3.70 percent.

• 15-year FRM this week averaged 2.98 percent with an average 0.4 point, up from last week when it averaged 2.96 percent. A year ago at this time, the 15-year FRM averaged 2.98 percent.

• 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.90 percent this week with an average 0.5 point, up from last week when it averaged 2.89 percent. A year ago, the 5-year ARM averaged 2.92 percent.

Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for theDefinitions. Borrowers may still pay closing costs which are not included in the survey.

Quote
Attributed to Sean Becketti, chief economist, Freddie Mac.

“Dovish comments by Federal Reserve Chair Janet Yellen on Tuesday triggered a rally in Treasury markets and drove the 10-year yield down 13 basis points from last week’s high. Yellen’s comments came too late to affect this week’s mortgage rate survey, and the 30-year mortgage rate remained unchanged at 3.71 percent. However, if the Fed’s cautious tone persists, mortgage rates may register the impact in subsequent weeks.”