Home builders pay between $15,000 and $16,000 in framing lumber costs to build an average sized new home, according to data from a Bank of America Merrill Lynch Global Research analysis we explored a few weeks ago.
A U.S. producers dispute with softwood lumber producers in Canada has riled a market BoAML estimated to total $24.7 billion in 2017, one in which Canadian production represents 30% of US demand, and one where now, antidumping and countermeasure duties have added 20.23% to prices already under pressure from heightened volume demand.
So, tariffs have conspired with supply-demand pressure on softwood lumber prices to heap $9,000 of new expense in input costs on a new single-family home since January 2017.
Coupled with growth in housing, this helped tighten the market as imports from Canada declined (to 14 billion board feet in 2017 from around 16 billion board feet in 2016) and more than offset the 1 billion board feet of new supply that entered the market.
This, just as many of the nation's bigger volume home builders have shifted their business, land, design, construction operations, marketing, and investment models to aim at the lower tiers of the price spectrum in response to a surge of demand at that part of the continuum.
Now, confidence and sentiment are subjective takes on what's coming around the next corner, and even a two-point slippage in home builder sentiment, as reported yesterday in a monthly release of data from the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), in an economic and business environment rife with buoyancy and momentum is noteworthy.
Builders are optimistic about housing market conditions as consumer demand continues to grow. However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.
As the saber-rattling on a new onslaught of tariffs and increasingly painful countermeasures gets more vicious by the day, builders--who face having to make upfront investments on land and materials and the cost of capital well in advance of seeing any return on such investments--are left to wonder not only about risks to their own cost structure, but ultimately, they also have to worry about the domino effects of trade wars on macro-economic factors such as jobs, household formations, consumer spending, and fundamental demand.
New York Times economics reporters Ana Swanson, Keith Bradsher, and Katie Rogers write:
The trade conflict with China comes as the administration wages several trade conflicts at once. Rather than forming a coalition of countries to pressure China to change its trade practices, as some foreign leaders and trade officials have urged, the president has put allies on edge with tariffs on metal from Europe, Canada and Mexico and threats to withdraw from the North American Free Trade Agreement.
If they do go into effect, the tariffs would greatly increase the disruption for international companies, which are already anxious about the prospect of higher costs on many goods that move between the United States and China.
Kip Eideberg, the vice president of public affairs and advocacy at the Association of Equipment Manufacturers, which represents major American exporters like Caterpillar and John Deere, said the additional tariffs were “terrible news” for his industry.
“It will effectively wipe out all of the gains that our industry has seen from tax reform and regulatory relief,” he said. “We should be creating more jobs, not wiping them out.”
At our Housing Leadership Summit last month, Moody's senior director Marisa DiNatale mapped and charted and plotted scenarios for the impacts international trade disputes--ranging from skirmishes to all-out war--might have on both the broader economy and housing's recovery.
Underlying all of the scenarios--threatened at that time, but not yet in the full bloom they have reached now--was a principle caveat, which is that trade wars are not normally won by anyone.
According to Moody's, the current gamut of tariff measures and countermeasures vs. China looks something like this.
And China's first salvo of reprisals, which will be particularly painful to America's farm heartland exporters, includes the following.
With all of the international trade plates spinning as they are now, and intensity and rancor building up on just about every front, including Canada, Mexico, the European Common Market, and China, the implications of globalized trade animosity with the United States could impact corporate profits, jobs, household spending, and tip the country into a recession. Here's the Moody's scenario for a trade war's impact on U.S. jobs.
Now, housing demand, per se, would still be supported by strong demographic fundamentals and pent-up unmet demand. But a recession with job loss and economic uncertainty would certainly exert itself on both consumer confidence and housing demand if a trade war escalates to the levels current rhetoric suggests.
Here, DiNatali notes that North America stands to lose the most as a consequence to all-out trade wars.
But where it will hit hardest in economic repercussions, household spending behavior, and ultimately, housing demand, include states that, right now, are hot, new-home markets in the Southeastern U.S., across through Texas.
So, the potential hit to builders is not only in the prices they're paying for lumber and other building materials and products, and their impact on house prices. It may domino right down to where it will really hurt, demand for new homes.
That's why uncertainty and risk associated with anticipating where trade disputes will go next can impact on how optimistic builders are with their big upfront investments. Doubts start to surface, not only on how much they'll have to pay for what they buy, but on who will be around to pay the price for house full of materials that cost much more.