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Morningstar | Our Wood Product Valuations Fall Along With Our Tempered Housing Starts Forecast

Increasing headship and homeownership rates among millennials remain a key tenet of our housing outlook. More millennials are indeed forming households and buying homes, but we've been repeatedly disappointed by the rate of headship and homeownership gains for this large age cohort. While we previously expected a sharper increase in home purchasing as millennials seized upon favorable ownership conditions, factors such as student debt and underemployment have proved more stubborn than we originally expected, and tightened Federal Housing Administration lending standards certainly doesn't help. For these reasons, we're now projecting a more gradual climb in new-home construction, to over 1.4 million starts by 2025, as demand is bottlenecked to some extent by financial constraints. We expect single-family starts will grow at over a 3% pace through 2025, reaching nearly 1.1 million starts. However, we think multifamily starts are near peak levels and will decline at a 2% CAGR through 2025, which is still above the long-term average annual rate for multifamily starts. Over the next decade (2019-28), we're projecting 13.7 million cumulative starts, 7% lower than our previous forecast of 14.7 million starts.

This change negatively affects our outlook for the wood products industry, which derives the vast majority of its profits from the U.S. housing market. We've tempered our medium-term lumber, panel, and timber price forecast, which results in lower EBITDA forecasts, leading to fair value reductions. Timber companies Weyerhaeuser and Rayonier now have fair value estimates of $21 and $25 per share, respectively, down from $22 and $25.50. Lumber companies West Fraser and Canfor now have fair values of CAD 46 and CAD 17 per share, respectively, down from CAD 51 and CAD 18.50. Panel companies Louisiana Pacific and Norbord now have fair value estimates of $17 and CAD 33 per share, respectively, down from $18 and CAD 38 per share, respectively.