Posted May 30, 2018

Builders say lumber tops labor as biggest challenge

Framing lumber prices have risen 59 percent since early 2017. 

NAHB Chief Economist Robert Dietz provided this housing industry overview in the bi-weekly newsletter Eye on the Economy:

The most serious headwind facing housing markets today is the escalation of framing lumber prices — up 59% since the start of 2017. Recent NAHB surveys suggest the price for lumber has overtaken the availability of labor as the primary business challenge for home builders.

Since the beginning of last year, rising lumber prices have added more than $7,000 to the price of a typical new home and more than $2,000 to the price of a typical apartment.

“In the little markets, most builders are very small and so are their margins. When you add $7,000 to the cost of a home [that’s 300,000], people walk away,” said Dale Oxley of Modern Home Concepts in Hurricane, W.Va. “When you have a market that’s anemic, a small builder is pretty much out of business – you can’t get an appraisal to reflect [the additional cost of lumber], so it’s left to the contractor to eat.”

There are a number of reasons why lumber prices have jumped, including a rail car shortage in Canada, but the primary factor is the 21% effective tariff rate placed on Canadian softwood lumber. The ongoing concerns over trade wars represent a macroeconomic risk to the gains resulting from the recent tax legislation, and lumber is a prime example.

Nonetheless, builder confidence remains strong, despite total housing starts falling 3.7% in April. Though multifamily starts declined 11% last month, that market is up 10% year-to-date, outperforming our forecast. And single-family starts are 8% above their year-to-date totals from a year ago. However, recent data show a gain in average new-home size, which is an early indicator of weakness in the entry-level market due to rising input costs.