United States

Timber! Rising Canadian lumber prices fell builder confidence

A Q&A with Brandon Maves, national construction sector leader

THE REAL ECONOMY  | 

The cost of Canadian lumber, a major source of wood for U.S. homes, has risen sharply this year, due in part to tariffs of about 20 percent put in place in 2017, when the U.S. Commerce Department determined that Canadian companies were selling lumber in the United States at unfair prices.

The higher prices, which come amid additional U.S. tariffs on Canadian goods, have served as a wake-up call for U.S. homebuilders, driving up home prices and creating concern about the future of the supply chain. RSM’s national construction industry leader, Brandon Maves, discusses how builders have adapted—and how they can plan for the months ahead.

Q: It looks like a good time to be a lumber producer and a challenging time to be a homebuilder. What cost increases are builders seeing?

Maves: That’s a very good way to put it. While clients aren’t talking about lumber prices specifically, they’re concerned because it’s part of the broader construction cost increase. Costs overall have gone up 10 percent to 20 percent during the past two years. That includes increases in labor costs and the price of nails due to steel tariffs.

Q: How are builders responding to the rise in construction costs?

Maves: They’re passing all of it on to the buyer. The question is, how long can you do that? Because you've also got rising interest rates, so the cost to finance a house is also going up. That doesn’t matter as much for higher-end buyers who can handle the difference between a $1 million and $1.1 million home. But the lower-end builders—including some townhouse builders—are much more sensitive to price changes for lumber and other materials, because their buyers are more sensitive to those changes.

Q: Are builders using different materials to avoid high costs? Is anyone saying, “We’re getting more in love with brick?”

Maves: No, no brick love yet. I haven't heard a word about alternative building materials. That would be a major departure—they've been building houses with soft lumber for centuries.

Q: Have rising costs prompted other changes in doing business?

Maves: Builders are unwilling to take bigger risks. A developer client of mine said that around 2005, he was getting as much land as possible. He couldn’t spend money fast enough. Now, his buying process is much more reserved. That’s true for other builders. Whether it’s land or lumber or any other materials, they’re much more diligent and taking a just-in-time approach, so they don't get overextended.

Q: What advice do you have for homebuilders in this economic landscape?

Maves: We're encouraging our clients to make sure they've got good access to capital via lines of credit and other debt instruments. And we tell them to be mindful of how far ahead they get. Don't make any purchase commitments that they don't feel they can turn quickly.

Q: As you keep an eye on the economic shifts that concern homebuilders, what numbers have caught your attention?

Maves: The 10-year Treasury note tends to be the trend line that the 30-year mortgage follows. As that rises, it usually portends a rise in mortgage rates. I also pay attention to the rising cost of building materials, as we've talked about. One thing I watch is the Bureau of Labor Statistics Producer Price Index. It doesn’t point to the future, but shows monthly price changes for key building components, such as steel, lumber and cement.

I also listen to the overall chatter from the Federal Reserve. It gets a lot of data, and as the short-term rate increases come through, that affects contractors' ability to obtain working capital.

Q: Tariffs play a role in the price increases, but aren't there other causes—like growing demand accompanied by supply shortages (due to severe Canadian wildfires last year and also a pine beetle infestation in British Columbia)?

Maves: I view that as kind of the normal part of the course of business. The flow of construction materials goes up and down, and overall demand moves in the market. Some of that is what I would call just normal things that do happen. They're not great, whereas the tariffs are something we've kind of thrown on top of it.

Q: With the ongoing cost challenges, how would you describe builders’ mood about the economy overall?

Maves: They are cautiously optimistic about the next 18 months. After that window, they get pretty nervous. The economy is growing at a good clip, and for the next 18 months, they can see where the revenue is coming from. Their concern is what happens after that. As costs keep rising, you can only go so far with passing it on to consumers. The last time homebuilders consistently raised prices like this was the last real estate boom around 2006. As a result of the bust, lots of middle market homebuilders were largely wiped out. Homebuilders don't want to repeat that. When the market slows down, they don't want to get caught on the wrong end of it.

Download The Real Economy Vol. 43

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