No, the so-called Trump lumber tariffs will not threaten the U.S. housing recovery
We have received a slew of media inquiries recently from reporters who were pushing the following storylines:
1. Donald Trump’s tariffs on lumber have caused prices to surge from about $300 per thousand board feet (MBF) to more than $600 per MBF.
2. Surging building materials prices pose a potentially mortal threat to the U.S. housing recovery.
Our short responses to these storylines are as follows 1) that ain’t necessarily so, and 2) that’s hogwash. Our more detailed responses are below.
The Real Reason Lumber Prices Have Surged
It is true that the U.S. imposed two kinds of trade restrictions on Canadian softwood lumber imports in the second quarter of 2017—a countervailing duty in April and an anti-dumping duty in June. These were not “Trump Tariffs” however. Rather, they were merely the latest round of a long-standing dispute concerning softwood lumber between the U.S. and Canada that goes back more than 35 years. In fact, the U.S. position was supported by all four Democratic Senators from Washington and Oregon and would have changed very little (if at all) had Hillary Clinton won the 2016 Presidential election.
Now to be sure, the tariffs do have a hand in the increase in lumber prices. Lumber market participants started to price in the effects of these restrictions starting in the first quarter of 2017. Western Spruce Pine Fir 2×4 mill prices entered 2017 at $310 per MBF and climbed to $403 by July. The rise in the Random Lengths Framing Lumber Composite price at the mill was less dramatic; it increased from $358 per MBF in January to $396 in July (and $421 in August). On the whole, we estimate that the U.S. trade restrictions account for about a third of the run-up in lumber prices since late 2016.
What else is behind the surge in lumber prices? The first culprit is general market tightness caused by a combination of restricted supply and growing demand. The main supply restrictions come out of Canada and are due to a combination of a massive pine beetle infestation in British Columbia (and to a lesser extent Alberta), and a slew of environmental and market access restrictions in Eastern Canada. At the same time, demand continues to grow. U.S. housing starts have averaged 1.32M over the first five months of 2018 compared to a 1.18M average for 2016 as a whole. Moreover, residential improvement expenditures (a huge driver of lumber demand) continues to surge, thanks to rising home equity and an aged U.S. housing stock.
In addition to this generally tightening market, lumber markets have been buffeted by a series of supply shocks that have boosted prices. First, we had an extremely bad fire season in British Columbia, Washington and Oregon that kept loggers out of the forest for extended periods and prevented companies from building log inventories that would be required if demand surprised on the upside (which it did).
Not long after the fire season ended, Western Canada endured an abnormally cold winter which wreaked havoc on Canada’s rail network. The cold weather caused Canadian National and Canadian Pacific to run fewer cars on each train and to run each train at slower speeds. This led to delays and backups of the myriad products that CN handles. Then as conditions eased, the rail carriers gave priority to higher value goods such as grains and potash, which exacerbated the delays in lumber shipments. Fortunately, these problems are starting to be sorted out, which helps to explain some of the recent retreat in lumber prices. Transportation issues are not just affecting Canadian shippers: spot trucking rates are soaring in the U.S., driving up the cost of both getting the logs to the mill and the lumber to the yard.
We provide one more snippet of evidence that trade restrictions are not the primary driver of surging lumber prices. Consider that structural panels such as OSB and plywood are subject to many of the same supply and particularly demand drivers as lumber and that there are currently no trade restrictions between the U.S. and Canada on OSB and plywood. Yet prices for each have risen by 59% and 51% respectively between 2016Q4 and 2018Q2. By comparison, the Random Lengths Framing Lumber Composite price has risen by 54% over that same timeframe.
So, while the trade restrictions did cause lumber prices to rise when they were originally imposed in 2017Q2, they are not the primary cause of the more recent and pronounced run-up in lumber prices.
Higher Wood Products Prices Will Have Negligible Effect on U.S. Housing Recovery
We entered the term #lumber tariffs into the Twitter search bar and were barraged with a slew of links to articles that screamed that surging lumber prices were a mortal threat to the U.S. housing recovery. Many of these articles uncritically cited a NAHB report which found that the lumber tariff has “pushed up the price of a typical newly-built home, according to our survey data analysis, by about $9,000”.
We decided to subject this claim, which is based on survey data, to a little arithmetic. And it does not even come close to approximating reality.
Let’s look at the total wood products costs of building the average new single-family home in 2018. We assume an average home size of 2,650 square feet. We’ll exclude engineered lumber and hardwood products such as floors and cabinets from this analysis. We’ll consider the period between 2016Q4 (before President Trump took office) and 2018Q2.
Our analysis (which ironically is based on detailed NAHB data) shows that the average new home will use about 15,000 board feet of lumber, 11,500 square feet of OSB (7/16” basis) and 2,200 square feet of plywood (15/32” basis). Dealers typically command a 15% to 20% markup on lumber and a 12%-15% markup on structural panels.
Now all we need to do is take the delivered price for each product, apply the mark-up to it and then multiply by the usage rate in a typical home and we get a very good idea of how much each product contributes to the cost of a home. We started the analysis using the Random Lengths Framing Composite price for lumber and the southern prices for panels (all of these are mill prices). We applied a 18% markup for lumber and a 14% markup for panels and added a delivery price. We estimate 2016Q4 delivery prices of $50 per MBF for lumber and $47 per MSF for panels. For 2018Q2, lumber delivery prices were estimated at $75 per MBF and panel prices are estimated at $54 per MSF.
As Table S1 shows, with 2016Q4 prices, the lumber required to build a typical home would cost $7,115 while the OSB and plywood would cost $4,235 and $1,008 respectively. Now when we apply 2018Q2 prices and the lumber costs increase to $10,939 and the OSB and plywood increase to $6,463 and $1,480 respectively. Thus, the total change in lumber prices between 2016Q4 and 2018Q2 added $3,823 to building costs, while OSB added $2,229 and plywood added $472.
The average price of a new home over the first four months of 2018 was about $326,000. The total increase in lumber costs from 2016Q4 to 2018Q2 is only 1.2% of that cost. And remember that home purchases are usually amortized over 30 years. If we assume a 4.75% mortgage rate and a 30-year term, the total increase in lumber costs adds less than $20 a month to a typical mortgage payment.
We have shown earlier that the trade restrictions are only part of the story behind rising lumber costs and not even the main part at that. If one accepts our estimate that a third of the run-up in lumber prices is due to trade restrictions, then the “cost” of the trade restrictions come to about $1,262 per home or $6.58 on a monthly payment.
It’s safe to say that though the housing recovery may have 99 problems, rising wood products prices ain’t one.