Some commentators have started talking about a cooling housing market, as we appear to be looking at multiple rate hikes this year that will be reflected in higher mortgage rates, making home purchases that much more difficult. While there will no doubt be notable impact from rate hikes, that is not the only issue in the housing market.

A much bigger consideration is the lack of inventory, especially in the affordable category and a demand side push from a demographic perspective that overrides the rate issue. Besides, as we seem to be headed toward multiple rate hikes, the tendency to get in before the next increase will also drive home buyers right through the year.

In fact, Freddie Mac recently published its expectations for the year. It expects mortgage rates to trend higher from around 3% in 2021 to 3.6% in 2022 and 3.9% in 2023. But demand is so strong that this won't really hurt home sales, which will remain at last year’s level of 6.9 million and increase to 7.1 million next year. Purchase mortgage originations will grow from $1.9 trillion in 2021 to $2.1 trillion this year and $2.2 trillion in 2023 with refinance activity being understandably slower.

With demand being where it is, homebuilders are in a good position to capitalize on the situation. But there’s another group that’s equally likely to share in the spoils. And that’s the wood/timber/lumber producers.

It is because lumber prices started increasing again in the last few months of 2021, as DIY buyers jumped back in to take advantage of moderating prices. And then other factors started adding fuel:

First of all, in November itself, the Commerce Department more than doubled tariffs on Canadian softwood producers to 17.99%. Since Canada accounts for a quarter of the country’s lumber supply, the higher tariff was a big factor in raising prices.

Second, environmental issues including storms and flooding have hit Canadian suppliers and pine beetle infestations made matters worse.

Third, transportation and logistics issues in the U.S. have affected the industry, just as they have other industries.

While the tariff issue doesn’t benefit wood producers, the other factors contribute to shortages that allow them to raise prices.

Industry watchers don’t expect a return to the $1500+ per thousand board feet rate that we saw last year. But its worth noting that prices are already over $1000 per thousand board feet.

Most lumber producers are seeing their orders swell, with builders ordering in advance in the fear of continued price escalation and supply limitations that would affect their ability to serve the high demand for homes. This is also improving visibility for lumber producers.

One offsetting factor is the capacity addition in the Southern states that should increase supply, leading to some price moderation as we move through the year. In that respect, companies that have control/ownership over both the timber as well as the lumber are better positioned to benefit.

Given the above factors, wood companies like PotlatchDeltic Corp. (PCH Quick QuotePCH - Free Report) , Weyerhaeuser Co. (WY Quick QuoteWY - Free Report) , Boise Cascade Co. (BCC Quick QuoteBCC - Free Report) , Louisiana-Pacific Corporation (LPX Quick QuoteLPX - Free Report) and Rayonier Inc. (RYN Quick QuoteRYN - Free Report) are seeing their estimates move up. The Building Products – Wood industry to which they belong is in the top 18% of more than 250 Zacks-classified industries.

PotlatchDeltic and Weyerhaeuser carry a Zacks Rank #1 (Strong Buy) while Boise Cascade, Louisiana-Pacific and Rayonier carry a Zacks Rank #2 (Buy). All are seeing their estimates move up as the industry enters a phase of unexpected strength in demand leading to continued pricing power. Here is a brief description of each:

PotlatchDeltic Corp.

PotlatchDeltic is a leading Real Estate Investment Trust (REIT) that owns 1.8 million acres of timberlands in Alabama, Arkansas, Idaho, Louisiana, Minnesota and Mississippi. Through its taxable REIT subsidiary, the company also operates six sawmills, an industrial-grade plywood mill, a residential and commercial real estate development business and a rural timberland sales program.

Weyerhaeuser Co.

One of the world’s largest timberlands owners, Weyerhaeuser owns or controls 10.7 million acres in the U.S. and Canada and manages an additional 14.1 million acres under long-term leases in Canada. It also has 35 wood production facilities, making it one of the largest producers with customers in the residential, industrial, light commercial as well as repair and remodel markets.

Boise Cascade Co.

Boise Cascade of the largest producers of engineered wood products (EWP) and plywood in North America and a leading U.S. wholesale distributor of building products.

Louisiana-Pacific Corp.

Louisiana-Pacific is one of the largest producers of wood products like engineered wood siding, Oriented Strand Board (OSB) and EWP for homebuilding, retail, wholesale and industrial customers.

Rayonier Inc.

Rayonier is a leading timberland REIT with assets located in some of the most productive softwood timber growing regions in the U.S. and New Zealand. As of December 31, 2020, Rayonier owned or leased under long-term agreements approximately 2.7 million acres of timberlands located in the U.S. South, U.S. Pacific Northwest and New Zealand. It is also the managing member of a private equity timber fund business with three funds comprising approximately 141,000 acres. Rayonier’s ownership in the timber fund business equates to approximately 17,000 acres.

Price Movement Over Past Month

Image Source: Zacks Investment Research