Carney: Home Builders Wrongly Blame Trump Tariffs for Slight Slip in Confidence

PETALUMA, CA - JANUARY 21: A worker carries lumber as he builds a new home on January 21, 2015 in Petaluma, California. According to a Commerce Department report, construction of new homes increased 4.4 percent in December, pushing building of new homes to the highest level in nine years. (Photo …
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Homebuilder confidence unexpectedly slipped in June, prompting a home builder trade group to blame the Trump administration’s trade policies.

That is playing politics with the rising price of lumber.

Builder confidence in the market for new houses fell two points to 68 in June on the NAHB/Wells Fargo Housing Market Index (HMI). The decline was due in large part to sharply elevated lumber prices, according to the National Association of Home Builders.

The NAHB was quick to blame tariffs the Trump administration placed on lumber imported from Canada for the slip.

“Builders are optimistic about housing market conditions as consumer demand continues to grow,” said NAHB Chairman Randy Noel. “However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017.”

No doubt higher prices are eating away at the profits margins of homebuilders. But are tariffs really to blame?

While lumber prices are up sharply this year, the evidence suggests that tariffs are playing only a minor, supporting role in that rise. The Trump administration first put a 20 percent tariff on Canadian lumber in April 2017. That coincided with a jump in the price of framing lumber, as measured by the Random Lengths Composite Framing Price index,  from around $400 per thousand square feet to around $430, a 7.5 percent increase. But that was just about the high point for lumber costs last year. By year’s end, lumber was selling for $433, about 20 percent higher than it had the year before.

That was about 20 percent higher than the year prior. And while that might seem like evidence for tariffs pushing up prices, it is noteworthy that the December 2016 prices were up from December 2015 by around 13.6% despite no increase in tariffs at all.  And December 2015’s prices were 15.7 percent lower than December 2014. Between 2009 and 2010, the average annual price rose 27 percent.

In other words, there’s a lot of volatility in lumber prices. The biggest factor driving prices is demand for lumber, which is why prices picked up so quickly when the housing market started to recover in 2010.

Even though the broader economy got off to a slow start in the first quarter of 2018, new housing starts were up 7.14 percent in the first quarter compared with the prior year. And things have picked in the second quarter. April’s housing starts–the most recent month available–were 10 percent than the prior year, according to Census Bureau.

The NAHB points out that lumber prices Random Lengths Composite Framing Price index is up 59 percent since the start of 2017. But most of that increase is quite recent. The price of lumber jumped all the way up to $552 per thousand feet in May, from $498 in April. That 10 percent rise mirrors the month earlier rise in housing starts.

Lumber tariffs did not, however, increase from April to May.

Which indicates that tariffs are likely not the big driver of rising prices. Rather, it is the strength of the economy. The rapid rise in the price of lumber in May is very likely an early indicator that housing starts will come in higher than expected in May. We’ll find out Tuesday if that prediction is right.

Even the NAHB agrees that the accelerating economy will spur additional building this year.

“Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead,” said NAHB Chief Economist Robert Dietz.

Certainly, home builders do not seem all that worried about tariffs.  Despite the decline in June, the confidence index has averaged 70 so far in 2018, the highest level ever. Not even the housing bubble of the mid-2000s saw that level of homebuilder confidence.

To be sure, lumber prices would likely be cheaper in the absence of the Trump tariffs, which would mean bigger profits for homebuilders. In no small part, this would be due to Canada’s practice of selling lumber to its sawmills from government forests at below market prices–the very practice that gave rise to the U.S. tariffs in the first place.

But there’s little reason to give credence to the NAHB’s assertion that the tariffs are the primary, or even a major driver, of price hikes that came nearly a year after the tariffs were introduced.

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