MNI ANALYSIS: Tariff Impact Seen On Home Construction

By Sara Haire and Holly Stokes

     WASHINGTON (MNI) - Amidst tariffs and labor shortages, the housing market

provides a first look at potential future tariff implications, as rising

construction costs and housing prices threaten to dampen consumers purchases.

     In early 2017, a trade deal between the US and Canada expired after 10

years. Following the expiration, the Commerce Department announced a tariff

between 3% and 24% on Canadian exports of softwood lumber, primarily used in

residential construction. The US imports most of their lumber from Canada, and

according to NAHB in 2015, lumber accounts for 10-15% of the cost of home

building - giving the tariff an immediate impact on home construction. 

     With the end of the trade deal and announcement of tariffs, lumber prices

rose while imports and supply of lumber fell, causing input costs for

construction companies to rise. 

--INPUT COSTS PASSED ONTO HOME PRICES

     Following President Trump's announcement of tariffs on Canadian softwood

lumber in April, the median home price for new homes rose 4.0% month/month in

May, and up 9.6% year/year. Again, in November, when the Commerce Department

confirmed the failure to reconcile the trade dispute and that the tariff would

be pushing forward, new home prices jumped 7.5% month/month, up 9.0% year/year,

to its highest on record. 

     The rising cost of softwood lumber and, in turn, private residential

construction, marked a shift in the trend for new home prices. In 2016, prior to

the end of the trade deal, new home prices moved relatively independently of

private residential construction costs. However, 2017 shows a shift, where the

two generally move in tandem - suggesting that the rising cost and uncertainty

of softwood lumber imports had an immediate impact on consumers' costs.

     While there was an immediate impact on new home prices, the tariff also

created a ripple effect on existing homes, also seeing prices rise in May and

November. With less new homes available for purchase, existing homeowners are

not moving out of their current residences, causing a shortage in supply and

driving up prices for existing homes. 

--LABOR COSTS STRAIN PRODUCTION

     Even as home prices rise, new and existing homes have been elevated in

2017, on par or outpacing the housing bubble. Consequently, developers have

pushed housing starts and building permits issued to levels last seen in 2007.

To meet this demand, there has been an influx of hiring. Construction payrolls

have seen a 228,000 rise over the last year, causing the unemployment rate in

construction to drop to 7.4%, the lowest March since the series began in 2000. 

     While March construction payrolls declined, this does not indicate a lack

of need for workers. Instead, the decline was likely due to severe weather

causing construction to halt. Showing the still present demand for construction

laborers, NAR's Lawrence Yun reports that job openings for construction are at

historic highs. 

     This worker shortage has also led to increased wages in construction, with

the industry's March average hourly earnings rising 2.9% year/year to $29.43.

Ken Simonson, the chief economist of the Associated General Contractors of

America, notes that construction average pay is now 9.7% higher than the average

for all private employees. Again, this rising input cost feeds into construction

spending and is passed onto home prices.

--NEW TARIFFS SPARK PANIC BUYING

     Construction dragged the supplier delivery index in March's ISM Non

Manufacturing report, which slowed to a level not seen since Hurricane Katrina.

Respondents to the survey noted that construction demand soared with the

announcement of a tariff on aluminum and steel, as firms began to engage in

"panic buying" and suppliers struggled to keep pace.

     With mounting pricing uncertainty, respondents in construction firms

explained that long-term planning has become increasingly difficult as

distributors have stopped locking in prices for 30 days, instead holding for

just seven days. This has led to bulk buying, as pricing uncertainty heightens,

causing a cyclical effect of propelling future prices higher. The rising cost of

materials can be expected to boost March's construction spending, and later to

be passed onto the consumer in the form of housing prices, just as tariffs on

lumber did in 2017.

--HOUSING PRICES TO BECOME UNAFFORDABLE

     As housing prices continue to rise from soaring input prices, developers

are dependent on consumers' willingness and ability to spend. However, pullback

in real wages presents a growing threat that consumers may not be able to afford

the rising prices. Despite average hourly earnings rising in March, real average

hourly earnings are being outpaced by rising housing prices.

     If real wages do not pick up and prices continue to rise, demand for homes

could see a pull back. Further, as mortgage rates are likely to rise in the near

future with inflation picking up, propensity for buying over renting should

decline. 

     As the Administration continues to indulge in threats of imposing tariffs,

the sectors that will be affected by the potential "$100 billion" more tariffs

imposed on China could potentially partake in "panic buying," further raising

prices of goods. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

[TOPICS: MAUDS$,M$U$$$]