Are W e Out Of the W oods Yet: W hat Are The Main I ssues Facing Our - PowerPoint PPT Presentation

Are W e Out Of the W oods Yet: W hat Are The Main I ssues Facing Our I ndustry and The Main I ssues Facing Our I ndustry and Econom y in 2 0 1 5 and Beyond? Maine Forest Products Council Septem ber 8 th, 2 0 1 4 p ,

Key Topics • H Housing Markets i M k t • Likely to disappoint in 2015 • The longer the time horizon the better we feel • China • To understand where China is headed, we must look at why their lumber imports surged. why their lumber imports surged. • The era of tremendous growth is over • Lumber Demand Will Surge • Where will supply come from? • Canadian Dollar Will Remain Weak • Purchasing Power Parity • Purchasing Power Parity • Little pressure on oil prices

I t Hasn't Been Easy for Borrow ers W ith a Credit Score Below 7 0 0 to Get a Mortgage g g Percentage of Single-Fam ily Loans by Credit Score W eighted Average Credit Score 40% 7 7 0 35% 7 6 0 30% 7 5 0 25% 7 4 0 20% 7 3 0 15% 15% 7 2 0 7 2 0 10% 7 1 0 5% 5% 7 0 0 7 0 0 0% 6 9 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Less than 6 6 0 Less than 6 6 0 6 6 0 to 7 0 0 6 6 0 to 7 0 0 W eighted Average FI CO Score W eighted Average FI CO Score

New Hom e Sales Are Consistent w ith Few er Than One Million Starts Few er Than One Million Starts New Single Family Home Sales New Single-Family Home Sales 425* 425* 558* * 558* * Owner Build Share 31% 31% Single-Family Starts Needed to Replenish Sales 616 804 Not All Starts Completed 98.5% 98.5% Single-Family Starts Needed to Replenish Sales 625 816 Single-Family Share 68% 68% Total Housing Starts Needed to Keep Inventories Flat 920 1,200 * Average of the last 6 months ** Number Needed to Average 1.1M starts 4

New Single-Fam ily Hom e Sales Are Not Trending I n The Right Direction Thousands 1 ,4 0 0 1 ,3 0 0 1 ,2 0 0 1 2 0 0 1 ,1 0 0 1 ,0 0 0 9 0 0 8 0 0 7 0 0 6 0 0 5 0 0 4 0 0 3 0 0 2 0 0 1 0 0 0

Builders Are Facing Shortages of Labor a and Buildable Lots d u dab e ots Percent of Builders Reporting Problem s 65.0% 55 0% 55.0% 53 0% 53.0% 46.0% 34.0% 30.0% 21.0% 21 0% 13.0% 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 Cost/ Cost/ Labor Availability abo a ab ty Cost/ Land Availability Cost/ a d a ab ty Source: NAHB HMI Survey, Jan 2014

There I s Light At The End Of The Tunnel: Housing Markets Are Set To I m prove

Housing Starts are Near Depression Levels Per ‘0 0 0 in Population Millions 2 .4 1 2 2 .2 1 1 2 .0 1 0 1 .8 9 1 .6 8 1 .4 7 1 .2 6 1 .0 5 0 .8 4 0 .6 3 0 .4 2 0 .2 1 0 .0 0 .0 - 2 0 2 5 3 0 3 5 4 0 4 5 5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

Real GDP Grow th W ill Pick Up in 2 0 1 5 6 % Potential GDP Grow th 4 % 2 % 2 % 0 % -2 % 5 -Year Moving Average -4 % -4 % -6 % 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 1 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 1 8

US Hom e Equity Now Exceeds I ts Long-Term Trend Ow ner's Equity in Household Real Estate - Net W orth in Bil $ $14,000 $12,000 $10,000 $8,000 Trend line for 1980-2014Q1 $6,000 $4,000 $2 000 $2,000 $0 Source: Federal Reserve Flow of Funds data

Payroll Em ploym ent Breaking Out of 2 0 1 1 - 2 0 1 3 Range g Monthly Change in Payroll Em ploym ent 6 0 0 6 0 0 1 1 0.9 4 0 0 0.8 2 0 0 2 0 0 0.7 0 0.6 -2 0 0 2 0 0 0.5 0 5 Average 2011-2013 0.4 -4 0 0 0.3 -6 0 0 6 0 0 0.2 -8 0 0 0.1 -1 0 0 0 0

US Has Substantial Pent-Up Dem and for Durable Goods Average Age of US Cars and Light Trucks 12 Source: Polk 11 10 9 8 7 7 6 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

The Federal Budget Deficit Picture Has I m proved Markedly I m proved Markedly Government Revenues and Outlays as Percent of GDP 26% Outlays 24% 22% 20% 18% 18% 16% Revenues Revenues 14% Dotted Lines are 1 9 7 2 -2 0 1 2 Averages 12% Source: Congressional Budget

Aug g-14 Rise in Mortgage Rates and 1 0 -Year Jul- -14 Jun n-14 Governm ent Bond Yields Halted Governm ent Bond Yields Halted May y-14 Apr r-14 Mar r-14 Feb b-14 Jan -14 Dec c-13 Nov v-13 Oct- -13 Sep p-13 Aug g-13 Jul- -13 Jun n-13 10-Year Gov't Bond Yields May y-13 30-Year Mortgage Rates Apr r-13 Mar r-13 Feb b-13 Jan -13 Dec c-12 Nov v-12 Oct- -12 Sep p-12 Aug g-12 Jul- -12 Jun n-12 May y-12 Apr r-12 Mar r-12 Feb b-12 Jan -12 5 .0 % 4 .5 % 4 .0 % 3 .5 % 3 .0 % 2 .5 % 2 .5 % 2 .0 % 1 5 % 1 .5 % 1 .0 %

Recent Rate I ncreases in Historical Context Context 1 8 % 1 6 % 10-Year Gov't Bond Yields 1 4 % 1 2 % 30-Year Mortgage Rates g g 1 0 % 8 % 6 % 4 % 2 % 0 %

Housing W ill Rem ain Affordable Despite Higher Mortgage Rates and Hom e Prices Source: NAR, FEA 2 4 0 2 2 0 Hom e Affordibilty I ndex 2 0 0 Slightly Pessem istic Scenario* 1 8 0 1 6 0 1 6 0 A Average 1 9 9 0 -2 0 0 5 1 9 9 0 2 0 0 5 1 4 0 1 2 0 1 0 0 A value of 100 means that a family with the median income 8 0 has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that 6 0 family earning the median income has more than enough 4 0 income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. h i 20 t d t 2 0 0 8 1 8 3 8 5 8 7 8 9 9 1 9 3 9 5 9 7 9 9 0 1 0 3 0 5 0 7 0 9 1 1 1 3 1 5 * Assumes mortgage rate gradually increase to 5% by end of 2015, income growth averages 2.3% and home price increase at a 5.5% annual rate.

Lending Standards Eased in Third Quarter ( Net Percentage of Dom estic Respondents Tightening 2 0 1 4 Q3 2 0 1 4 Q2 17 2 0 1 4 Q1 Standards for Prim e Mortgage Loans) Standards for Prim e Mortgage Loans) Source: Federal Reserve Senior 2 0 1 3 Q4 2 0 1 3 Q3 2 0 1 3 Q2 2 0 1 3 Q1 2 0 1 2 Q4 Loan Officers Survey 2 0 1 2 Q3 2 0 1 2 Q2 2 0 1 2 Q1 2 0 1 1 Q4 2 0 1 1 Q3 2 0 1 1 Q2 2 0 1 1 Q1 2 0 1 0 Q4 2 0 1 0 Q3 2 0 1 0 Q2 2 0 1 0 Q1 2 0 0 9 Q4 2 0 0 9 Q3 2 0 0 9 Q2 2 0 0 9 Q1 2 0 0 8 Q4 2 0 0 8 Q3 2 0 0 8 Q2 2 0 0 8 Q1 2 0 0 7 Q4 2 0 0 7 Q3 2 0 0 7 Q2 80% 70% 70% 60% 50% 40% 30% 20% 20% 10% 0% -10% -20%

Purchase Share of Mortgage Lending W ill I ncrease As I nterest Rates Rise Purchase Share of Total Mortgage Originations 3 0 -Year Mortgage Rate 1 0 0 % 1 0 % 9 0 % 9 0 % 9 % 9 % 8 0 % 8 % 7 0 % 7 % 6 0 % 6 % 5 0 % 5 % 4 0 % 4 0 % 4 % 4 % Linear Trend 3 0 % 3 % 2 0 % 2 % 1 0 % 1 % Sources: Mortgage Bankers Association, Federal Reserve 0 % 0 %

New Hom e I nventories Are Near Rock Bottom Million Units 0 .6 0 Completed Under Construction Not Started Total 0 .5 0 0 .4 0 0 .3 0 0 .2 0 0 .1 0 0 .0 0 6 5 6 5 7 0 7 0 7 5 7 5 8 0 8 0 8 5 8 5 9 0 9 0 9 5 9 5 0 0 0 0 0 5 0 5 1 0 1 0

Housing Starts W ill I m prove But Rem ain W ell Below Trend I n 2 0 1 5 Millions of Units 2 .4 0 Single Fam ily Single Fam ily Multifam ily Multifam ily 2 2 0 2 .2 0 2 .0 0 Average Housing Starts 1 9 5 9 - 2 0 0 0 1 .8 0 1 .6 0 1 .6 0 1 .4 0 1 .2 0 1 .0 0 1 .0 0 0 .8 0 0 .6 0 0 .4 0 0 .2 0 0 .0 0 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4

Long Run, Housing Starts W ill L R H i St t W ill Be Strong

Cum ulative Over-/ Under-Building of Conventional US Hom es Millions 3 .0 2 .0 1 .0 0 .0 -1 .0 Forecast -2 .0 -3 .0 -4 .0 -5 .0 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Underlying Dem and for Housing FEA Base Case FEA Base Case 1 9 8 0 - 1 9 9 0 - 2 0 0 0 - 2 0 1 0 - 2 0 2 0 - 1 9 9 0 1 9 9 0 2 0 0 0 2 0 0 0 2 0 1 0 2 0 1 0 2 0 2 0 2 0 2 0 2 0 3 0 2 0 3 0 Net Households 1.26 1.14 1.20 1.15 1.33 Form ations Form ations Rem ovals .27 .32 .30 .30 .32 .15 .06 .07 .05 .06 Second Hom es Frictional .09 .09 .08 .08 .08 Other Mobile Hom e .02 .02 .01 .01 .01 Total Dem and Total Dem and 1 78 1.78 1 63 1.63 1 68 1.68 1 59 1.59 1 80 1.80 About 100K of these are mobile homes

W hen W ill Markets Return To W hen W ill Markets Return To “Norm al”: Household Form ations Form ations

US Household Form ation Are W ell Below Trend 2 0 1 1 3 Average 1 9 8 0 -2 0 0 7 Average 1 9 8 0 -2 0 0 7 2 0 1 1 2 2 0 1 1 1 2 0 1 1 0 2 0 0 0 9 Average of Household Form ation and Change in Occupied Housing 2 0 0 0 8 2 0 0 0 7 2 0 0 0 6 2 0 0 0 5 2 0 0 0 4 2 0 0 0 3 2 0 0 0 2 2 0 0 0 1 2 0 0 0 0 1 9 9 9 9 1 9 9 9 8 1 9 9 9 7 1 9 9 9 6 1 9 9 9 5 1 9 9 9 4 25 1 9 9 9 3 1 9 9 9 2 1 9 9 9 1 1 9 9 9 0 1 9 8 8 9 1 9 8 8 8 1 9 8 8 7 1 9 8 8 6 1 9 8 8 5 1 9 8 8 4 1 9 8 8 3 1 9 8 8 2 1 9 8 8 1 1 9 8 8 0 2 ,0 0 0 1 ,8 0 0 1 ,6 0 0 1 ,4 0 0 1 ,2 0 0 1 ,0 0 0 8 0 0 8 0 0 6 0 0 4 0 0 2 0 0 0

No Household Form ations Am ong Younger Population Y P l ti Grow th in Population vs. Households 2 0 0 7 to 2 0 1 2 2 .0 Population Household 1 .5 1 .0 n Millio 0 .5 0 .0 -0 .5 -1 .0 1 6 -2 4 age group 1 6 2 4 age group 2 5 -2 9 age group 2 5 2 9 age group 3 0 -3 4 age group 3 0 3 4 age group