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Costs hammer homebuilders

Lumber prices are driving up the prices of new homes nationwide, thanks to a tariff on Canadian softwood lumber, and posing a challenge for many builders. A pile of framing lumber lies at a construction site at a D.R. Horton subdivision near Paseo del Norte and Universe NW. (Greg Sorber/Albuquerque Journal )

Copyright © 2018 Albuquerque Journal

It takes a lot of lumber to build a house, and the price of that wood has gone way up recently.

John Garcia, executive vice president of the Home Builders Association of Central New Mexico, said his members are grappling with higher lumber costs in part because of a 20 percent tariff the Trump administration slapped on softwood timber imports from Canada, a major supplier of framing lumber to the United States. The tariff was imposed starting in November 2017, but retroactive to January.

And on top of that, last year’s devastating hurricanes and floods in Houston and Florida and deadly wildfires in California created a surge in demand. As a result, prices have jumped an average of 30 percent year over year, said Garcia.

“It’s been a big problem for most of this year,” he said.

“With production price uncertainty,” Garcia added, “it’s getting costlier for people to build homes.”

And that, he said, could sideline some buyers, especially first-timers, who are usually a huge driver of new-home sales.

Framing lumber, including installation costs, accounts for about 18 percent of the average home’s selling price, according to the National Association of Home Builders.

The tariffs are designed to stoke the sale of U.S. lumber by discouraging builders from buying Canadian imports. According to the NAHB, in 2016, the U.S. consumed 47.1 billion board feet of softwood lumber but domestic producers were only able to supply 32.8 billion. Canada supplied about 96 percent of the softwood lumber needed to make up that gap.

The tariffs have “acted as a tax” on American homebuyers, the NAHB contends. A study by the organization’s economists concluded that the increase in the cost of lumber since the beginning of 2017 has been enough to drive up the price of an average new single-family home by $6,388, and the market value of an average new multifamily housing unit by $2,430.

Lumber prices are the highest they’ve ever been in the United States. Futures contracts for 1,000 board feet of lumber are trading at $513. For perspective, according to Wood Markets, in the 1980s it was rare for average monthly prices to exceed $200.

Big production builders like D.R. Horton and Pulte, who build the majority of new homes in the Albuquerque area, “have economies of scale” to withstand some of the pain, Garcia said. “For the little guy who has to build a lot of homes to break even,” a commodity hike affects profitability, and there will be pressure to raise prices and cut costs if lumber prices continue to rise, Garcia said..

Already squeezed by higher land prices and the availability of buildable lots, builders may look to as many efficiencies as they can to reduce costs, including changing the design of roof systems, wall panels and floors to use the least amount of material possible while still meeting building codes, Garcia said. They may also shift to smaller detached homes with simpler floor plans on even tighter lots, or build more multifamily dwellings to save money, he said. Others may cut administration costs, perhaps laying off salespeople or not building model homes.

With about 1,700 single-family home permits pulled last year in the Albuquerque area, according to DataTraq, home construction is not the force in the economy as it once was.

When the economy was on a tear, a record 9,445 permits were issued in 2005; a roughly 30-year low of 1,192 were issued in 2011. For a frame of reference, an average of about 4,000 permits were issued each year in the 1990s, according to DataTraq and the HBA.

“It’s been a marginal improvement,” Garcia said.