At the same time a full-on international trade war threat heats up to a boil, both among allies in Canada, Europe, and Mexico and with China, prices on residential building materials took another spike upward.
Inputs to residential construction–fueled by impressive month-to-month increases in softwood lumber (+6.4%) and OSB (+4.7%)–rose in aggregate in May vs. April by 1.9%, according to this analysis of Bureau of Labor Statistics Producer Price Index data by National Association of Home Builders director of Tax and Trade Policy Analysis David Logan.
Now, already-existing supply tightness and increased cyclical and seasonal construction activity volume and pace accounts for some fair share of the price pressure on building materials inputs. Logan writes:
The increase in prices paid for residential construction inputs (goods) was the fifth consecutive monthly increase. The index has already risen 5.8% in 2018 and sits 8.3% higher than it did in May 2017. Since January 2017, the index for prices paid for goods inputs to residential construction has only declined twice—in May and December of 2017—each time falling just 0.1%.
A microcosm that illustrates how a combination of already-existing supply-demand pressures and tariffs may work out can be seen in the way lumber costs have skyrocketed amidst a tariff battle on softwood lumber between the U.S. and Canada. New York Times staffer Peter Eavis writes:
Tariffs might be expected to push up the price of a good to a certain level, but in this case, the price of Canadian lumber kept rising.
The cost of 1,000 board feet of western Canadian lumber is up nearly 80 percent over the past 12 months, including about 40 percent this year, according to data from Random Lengths, a publication that covers the lumber market.
What caused this unusual rise? Paul F. Jannke, a principal at Forest Economic Advisors, a firm that analyzes the lumber market, said that the tariffs had contributed to the ascent. But, he added, a reduction in the supply of Canadian lumber, caused by recent rail slowdowns and tree disease, played a big role.
Add to that supply-and-demand cost pressure the potentially disruptive effect of new tariffs and retaliatory responses–and their impact on input costs–and the challenge of holding down, not to mention lowering, new home price tags to more attainable levels, and at the same time hold profit margins becomes a harder one to achieve.
This dynamic has flared up in a pivotal moment for a housing recovery that, to date, continues mostly to serve the needs of higher-income, higher-end parts of each customer segment, while many younger, less financially prosperous households remain effectively priced out of new homes and communities.
Labor–costs and predictability–had been the big risk factor to operational and delivery models over the past couple of years as home building activity picked up, but materials prices have nudged in right up there up top as a business risk.
Further, questions continue to crop up as to the effect on home buyer demand–the one solid fundamental that has withstood supply constraints and tolerated price increases up to now–as interest rates step up, and as the potential lagging impacts of tax reform rules on deductability play out over time. As one home building company strategic executive recently put it, “It’s no time for the feint of heart.”
