Tariffs weigh on housing market

Michael J. Berens

Wednesday, July 25, 2018

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Tariffs weigh on housing market

Present and future U.S. tariffs on imported goods are taking their toll on the housing market as both builders and would-be buyers worry about rising costs and the likelihood that economic growth will begin to slow next year. The impact can be seen in market indicators for June, which fell across the board.

Dragged down by rising materials and labor costs, especially the soaring cost of lumber due to increased tariffs on frame lumber from Canada, the rate of new home construction (in units) dropped 12.3 percent in June compared to May, a nine-month low, and is now 4.2 percent below the same time last year.

Single-family starts dropped by 9.1 percent. That trend likely will continue, as requests for permits declined to their lowest level of the year, 2.2 percent below May’s figure and 3 percent from a year ago. Completions remained flat, putting additional pressure on already tight inventories.

Dodge Data & Analytics reports a 4 percent growth (in dollar volume) in residential construction in June. Single-family construction grew by 2 percent, and is up 5 percent compared to a year ago, with the strongest activity occurring in the South.

According to Michael Neal, senior economist for the National Association of Home Builders, “The concern over material costs, especially lumber, is making it more difficult to build homes at competitive price points, particularly for newcomers entering the housing market.” The NAHB’s Housing Market Index, which measures builder confidence, remained unchanged in July, in part because of concerns that higher costs will price homes out of the reach of most prospective homebuyers.

Total increased cost of goods for residential construction is up 5.4 percent since the beginning of the year, with lumber leading the way. Lumber prices have skyrocketed as high as 20 percent higher, depending on the type and source of the lumber and the size of the house.

Those higher prices put a crimp in June new home sales (in units), which fell 5.3 percent, more than twice what industry experts had expected. Sales are still up 2.4 percent over last year, however. Prices fell for a second month, perhaps an indication of market pressures, but are still well above what most prospective buyers can afford. The media price of a new home came in at $302,100, and the average price was $363,300.

Builders are not the only ones worried about the effects of tariffs.

The University of Michigan’s Surveys of Consumers at early July showed “negative concerns about the impact of tariffs have recently accelerated, rising from 15% in May, to 21% in June, and 38% in July,” states the Survey’s chief economist, Richard Curtin. In particular, consumers, especially more affluent consumers, are concerned about the possible negative impact tariffs could have on economic growth in the near future and on inflation.

These bread-and-butter concerns are causing some hesitancy on the part of potential homebuyers. Fannie Mae’s Home Purchase Sentiment Index for June slid 1.6 points in June, following two months of gains, including an all-time high in May.

Rising home prices and mortgages are among the reasons. And while participants indicate that on the whole they are optimistic about the economy and their personal finances, more of them in June expressed concerns that they could lose their job and that their incomes were not higher than they were a year ago. Tariffs and threats of more tariffs to come are contributing to those dimmer outlooks.

Even with these concerns, demand for housing remains high. Tight inventories and rising prices, however, continue to shut many prospective buyers of existing homes out of the market.

Sales of existing homes declined for the third straight month, although by less than 1 percent. Sales are now down 2.2 percent from the same time last year, while the median price of a home hit a new all-time high ($276,900), up more than 5 percent from a year ago. Sales of single-family homes dropped by the same 0.6 percent and the median price ($279,300) rose by the same 5.2 percent.

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