Canadian National EMD SD70M-2 No. 8836, hauling a freight train with five loaded center beams at the front, passes the still-manned Elgin, Joliet & Eastern JB Tower in West Chicago, Illinois, and crosses UP's old Chicago & North Western main line. CN and UP are the largest rail transporters of lumber in the U.S. Chase Gunneau.
WASHINGTON — Mortgage rates at 30-year highs and a double-digit year-over-year decline in U.S. housing starts have caused Class 1 railroads' lumber business to decline by just 1%, or about 3,300 carloads, compared with July 2023. A currently proposed federal interest rate cut could help revive housing starts and provide a boost to the railroads' lumber business.
U.S. Class 1 railroads, including Canadian National Railway and Canadian Pacific Kansas City Railway, which handle the U.S. rail shipments, have moved more than 244,000 carloads of lumber so far this year, and business has remained roughly flat over the past year despite soaring mortgage rates, which peaked at 7.7 per cent in October 2023 for a 30-year fixed mortgage.
Mortgage rates are still high, averaging 6.8%, roughly the same as last summer and well above historical levels, according to data from mortgage lender Freddie Mac. Meanwhile, U.S. housing starts continue to decline, falling 5% from April to May 2024 to 1.28 million units annually, the lowest since July 2020 and down 18% year-over-year, according to U.S. Census Bureau data.
With inflation subsiding and the Fed expected to cut interest rates at least once in 2024, homebuilders and would-be buyers could eventually re-enter the market, increasing demand for lumber and creating opportunities for railroads to capture new demand. Housing starts are at the same level as the pre-pandemic level of 1.24 million in July 2019, after the pandemic uprooted the industry, causing new home construction to surge to 931,000 in April 2020, before recovering to a peak of 1.83 million two years later in April 2022.
As borrowing costs have risen, the housing market has cooled and lumber prices have fallen. High interest rates have affected homebuyers' ability to afford homes, and new homes are more expensive to build than they were two years ago. This has led to low housing inventory and discouraged purchases, which, combined with decades of low new home construction, has contributed to a housing shortage estimated at more than 3 million homes in the U.S.
As for how railroads are handling the challenge, volumes haven't fallen as much as some might think. In the U.S., Canadian National hauls the most lumber of any Class 1 railroad, with 66,277 cars so far this year. Its volumes are down 2.7% from last year, a decrease of about 1,845 cars. By comparison, Union Pacific, the second-largest lumber shipper by volume, has hauled 55,341 cars, down 4%, or about 2,000 cars.
Lumber operations at BNSF Railway and Canadian Pacific Kansas City were both flat, down less than 1 percent from a year ago. In the East, CSX Transportation's lumber operations were down 1 percent. In contrast to the other carriers, Norfolk Southern's lumber operations were up 1,275 carloads, up 5 percent from last year. Loading data is compiled and made public by each Class I railroad as part of their weekly reports to the Association of American Railroads.
But lower interest rates don't necessarily mean railroads will increase center-beam traffic. Trucking is a perennial thorn in railroads' side, and truckers are ready to work because of declining consumer discretionary spending, a byproduct of high interest rates. Railroads will have to get creative to win business in short-haul markets fed by southern yellow pine in the Southeast and spruce and other fibers from the Pacific Northwest, where trucks are more flexible and cost-effective.
The days of $1,500 per 1,000 board feet of lumber have come to an end due to the pandemic, and as the market rebalances, railroads must be increasingly aware of lumber producers’ focus on costs and transportation expenses. Lumber futures are currently trading at $435 per 1,000 board feet, roughly equivalent to pre-pandemic prices.
In preparation for the much-anticipated but gradually loosening monetary policy, railways are, or should be, devising strategies to shore up this business unit before the for sale signs start lining up in front of stations.