A new tariff on Canadian lumber threatens to squeeze an already tight housing inventory and further drive up soaring home prices.
The latest challenge to the listless housing market comes as mortgage lenders grow increasingly concerned about a purchase market resurgence that has failed to materialize and offset a steep decline in refinance activity.
The Commerce Department imposed a new 20% tariff on softwood imports in April that's designed to counteract the effects of Canadian government subsidies and make domestic lumber prices more competitive. The department will also determine whether to enact a second "anti-dumping" tariff later this month.
The tariff is expected to make the average median price of a single-family new home some $3,000 more expensive, according to the National Association of Home Builders. That's on top of rising mortgage rates and construction labor costs. And that figure could grow if domestic producers can't meet demand; lumber prices are already up 14% since January.
Houses built with higher-priced lumber will also mean fewer consumers can afford to buy homes, said NAHB Chief Economist Rob Dietz. For every $1,000 increase in home price, more than 150,000 consumer households are priced out of homeownership.
The annual pace of new home sales dropped 11.4% month over month in April. The median price for new homes was $309,200 in April, down 3.8% from March, according to the latest Commerce Department data.
Meanwhile, the annual rate of existing home sales dropped 2.3% month over month in April and the median existing home price was $244,800, up 1% from March and 6% from a year ago, according to the National Association of Realtors.
The new tariff comes following a Commerce Department investigation conducted at the request of U.S. lumber companies and covers a number of wood products commonly used in home construction, including lumber used for frames, siding and flooring. It'll be three to six months before the full effect of the tariff is felt. But tight inventory already has home prices increasing at a rapid pace this year.
"While the increase in the cost of materials may temporarily hang up some loans for new homes, as home prices increase in the coming months, they'll offset the increase in the cost of materials," said Lynn Fisher, vice president of research and economics at the Mortgage Bankers Association. Still, she said, "lenders will certainly be able to make loans."
During the first quarter, mortgage origination volume was at its lowest level since the beginning of 2014, as refinancing volume hit a 10-year low and demand for purchase mortgages remained tepid. And after reaching an all-time high in March, applications for new construction purchase loans fell 20% in April and were down 4.3% year over year.
An even bigger concern may be longer timelines for residential construction. Canadian lumber accounts for some 30% of U.S. supply and Canadian imports this year are already down 1.2 billion board feet. The U.S. has tried to fill the void, increasing domestic production by 800 million board feet. Higher prices then translate to slower construction.
"Lumber shortage is something that will impact the speed with which homes get built," said NAHB CEO Gerald Howard. "We're hearing anecdotally that builders are having difficulty getting their lumber packages and getting the deal done."
There was a 5.7-month supply of new home inventory and 4.2-month supply of existing homes in April, according to the Commerce Department and NAR. A six-month supply of housing inventory is generally considered a balanced market.
The U.S. and Canada have long bickered over lumber imports. Canada calls the new tariff "unfair and unwarranted," and has already begun looking for other markets to sell its lumber to.
The lumber quarrel comes as the Trump administration seeks to renegotiate the North American Free Trade Agreement and the new tariff may not be the last word on the matter.
"We've made clear that if any Canadian or British Columbian official wishes to bring present additional information, we will consider it carefully and impartially," Commerce Secretary Wilbur Ross said during a speech at a Council of the Americas conference last month in Washington, D.C.
"We continue to believe that a negotiated settlement is in the best interest of all the parties and we're prepared to work toward that end," he added.
Even with the tariff in place, there may also be a silver lining, according to the NAHB.
"With the higher tariff rate in place, it creates incentive for domestic production," said Dietz.
And Howard notes it provides an opportunity to re-evaluate U.S. forest policies. "We have not been harvesting lumber from our own national forests and that has led, in part, to forest fires," highlighting how the excess wood that can result in forest fires can be used instead to build homes.
The NAHB is also looking past Canada for new potential lumber imports to the U.S. The trade association is working on talks with Chile, Brazil, Finland and Sweden for lumber products, which would be competitively priced.
In the case of Chile, the U.S. free-trade deal with the country already includes lumber. Thus, growing domestic production while maintaining some Canadian imports and expanding imports from other countries should stabilize the market, said Dietz.
"The bottom line is that we really have to have some sort of alternatives here," he said.