In December of 2017, President Donald Trump imposed a tariff on lumber imports from Canada, specifically on softwood lumber products such as spruce, fir and pine. While only 30% of the United States’ supply of lumber comes from Canada and the rest comes from inside of the country, the tariffs put a significant strain on the prices of these products, which has been exacerbated by the increased demand stemming from a historic surge in new home construction.
The consequences of tariffs are nothing new in the construction industry, but with other factors — such as the recent wildfires in Canada and last year’s hurricanes which decimated southern shores, both of which moved prices higher — the situation home builders are facing is unique.
Surging U.S. home costs
Because lumber makes up roughly 10-15% of the total cost of a home and the new tariffs have caused an approximate 22% increase on the price of lumber coming from Canada, our company has estimated rising lumber prices are costing consumers an extra $1,684 on new homes priced around $312,000, which is the current median new home price in the U.S. This number doesn’t even factor in the rise in demand due to more homes being built than in years past.
For companies like ours striving to provide value-oriented housing amid soaring prices, this means we’re being forced to find other ways to keep our products affordable – such as building smaller homes so we don’t have to sacrifice amenities that are important to our customers. Combined with a shortage of skilled workers, fewer available lots and price increases on other materials such as roofing, drywall, paint and cabinetry, we see smaller homes with plenty of features being a long-term trend.
Effects on home builders
Soaring material prices can cause home builders a lot of headaches, but they aren’t the only consequence we’re feeling as a result of this tariff. In terms of daily business operations, lumber companies are having trouble nailing down the price of lumber more than a few weeks in advance.
Prior to the tariff on Canadian lumber, our company was able to receive price locks for lumber materials on a quarterly basis or even six months in advance. With the prices rising so rapidly, suppliers are no longer willing to provide estimates more than one month in advance, which makes it difficult for us to keep prices up to date and not sacrifice margins. Also, increasing prices often increases our risk of homes not appraising.
Long-term consequences for both builders and consumers
In order to address rising costs over time, home builders will need to pay closer attention to the affordability of our products and get creative about ways to reduce the final listing price. We’re being forced to modify our products more quickly in order to keep our prices in line with consumer wages.
The way we see it, cost-cutting can take place in one of two ways: We can continue to build homes at their current size and square footage but include fewer amenities, or we can build smaller homes that are designed to strategically eliminate dead space and continue to provide customers with all of our current amenity options. As we noted above, we’re betting today’s home buyer is more interested in a slightly smaller home with lots of features — like stone countertops, all-tile bathrooms, high quality appliances and finely crafted finishes — than they are in a bare bones, slightly larger home.
While many builders have these considerations in the back of their minds, this building trend may be closer than we originally thought. Builders who want to maintain their profit margins without sacrificing quality will need to begin thinking of long-term solutions within the next couple of months.
Adam Davidson is the president, CEO and founder of Davidson Homes, a leading builder of quality new homes in the southeast. For more information, visit www.davidsonhomesllc.com.