Tariffs Keep U.S. & Canadian Lumber Border-Bound
About Housing Affordability:
The evidence continues to pile on. Let’s just skip right over the sources and the comments. They are numerous and more frequent. 25% of all homes for sale have lowered prices. New and existing home sales are slowing and forecasted to continue this trajectory until demand is addressed. Specifically that is entry level and affordable. Both are a bit ambiguous, depending on geography. An affordable, entry level home in Southern California might be an upper end home in rural North Carolina. In short, for housing to regain upward momentum, the top 50 home builders must set the example and shift focus to smaller, less expensive communities, without reducing the quality of the home. These communities might have less common area amenities, but buyers still expect a well-built, low-maintenance, energy-efficient investment.
Off-site production is a growing sector that could help meet that demand, particularly if lumber and OSB remains more affordable.
About Lumber Affordability:
Tariffs have become a significant factor. We have seen the impact of a 22% tariff on Canadian lumber. Canadian producers cannot sell current lumber output to non-tariff customers. Without the U.S., Canada is its own best customer. That leaves SPF over produced.
The U.S. is in no better shape. The new 25% softwood lumber exports tariff on shipments to China are equally as crippling. China does not need Canadian or U.S. lumber or logs. They have Europe and Russia, with ample supply, ready to replace us both. The world lumber market is over produced and has the capacity to make more. The next effect of the tariffs is that they keep U.S. and Canadian lumber border bound and both over produced. That is good news for builders and the over-priced U.S. and Canadian housing market. Ultimately this is good for component manufacturers.
Housing’s One Chance to Save the Lumber Market
North American framing lumber is over produced. There is one way out of this hole other than production curtailments. Builders must address the entry level and more affordable housing demand. It is not likely that can happen before 2019.
If this happens, we should anticipate and prepare for a significant increase in 2019 housing starts...10+%. The framing package of smaller, more affordable homes will require less lumber. However, less lumber per start should be overcome by more starts, especially once apartment renters become home owners. As soon as builders commit to this sector, that will be all she wrote for multi-family.
Consider the volume of lumber used to build one 3BR apartment compared to one 3BR entry level home...easily 25% more in the home. Ultimately, that will bring over-produced lumber into balance with demand. With tariffs creating border boundaries, lumber prices will increase, once the builders’ emphasis on smaller homes begins.
How do we prepare for this dramatic shift in home production? The first impact will be home builders scheduling framing crews to get on and off jobsites more efficiently. Next, framing packages will be smaller, meaning contractor yards and component manufacturers will be making more frequent deliveries, with the sales volume of each delivery being less, i.e., servicing cost per job will increase; profit margins will decrease. The lumber side of housing is going to become more difficult in 2019.
This scenario makes attention-to-lumber-market-detail more critical than ever. Instead of short bursts of up & down volatility, we will see a more trending market. This will be opportunity for speculative buyers willing to hold larger inventory and for builders who can time lumber locks more precisely. But first, we need confirmation that builders will satisfy the need.
Looking Forward ...ml
A veteran lumberman, Matt Layman publishes Layman’s Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.info.