Building costs fluctuate on a daily basis, but the overall trend in recent months has been up.
In 2016, prices rose:
- 13.8% for oriented strand board (OSB), a type of particle board commonly used in home construction;
- 8.7% for softwood lumber, commonly used in home construction;
- 5.0% for gypsum products, such as plaster and plaster board; and
- 3.5% for ready-mix concrete, used for projects like foundations and driveways, according to the National Association of Homebuilders (NAHB).
Compare these price rises to the average consumer price inflation (CPI) in 2016, which was just 1.3%.
Further, in April 2017, President Trump announced a 20% tariff on softwood lumber imports from Canada, a major source of construction materials. In 2016, one-third of softwood lumber used by homebuilders was imported, with 95% of imports originating in Canada, according to the NAHB.
The tariff is meant to increase the sale of U.S. lumber by discouraging U.S. builders from purchasing Canadian imports. However, the sheer amount of lumber imported from Canada means U.S. lumber won’t be able to fully replace the taxed lumber. Builders will have to pay higher prices, or else stop building.
In California, the high price of land and California Environmental Equality Act (CEQA) roadblocks already produce high new home prices. More expensive building costs means the state’s presently high new home prices will become even more challenging for homebuilders.
How builders deal with higher building costs
How are builders dealing with this price rise?
The obvious choice is to pass the cost along to homebuyers. However, the new home premium is already 40%-50% above comparable home resales in California. New home prices can only rise so high before homebuyers look elsewhere.
The NAHB estimates the 20% tariff on softwood lumber from Canada will cost the U.S. in 2017 a net loss of:
- nearly $500 million in wages;
- $350 million in federal and state tax revenue;
- more than 8,200 full-time jobs;
- $945 million in single family residence (SFR) investment; and
- $146 million in multi-family investment.
Further, the tariff will cause the average U.S. new-build SFR price to increase $1,236 — and more in California, where home prices are higher than average.
As a temporary workaround, builders, like homebuyers, know when to look further abroad to save money.
To avoid the tariffs, builders have begun buying non-Canadian lumber at record numbers. European supplies of lumber have increased in the U.S. market, according to the NAHB.
Still, builders are likely to pay more for European lumber than Canadian (prior to the extra tariff) due to the additional shipping costs the lumber sellers will inevitably pass along to the builders. Additionally, other price increases of building materials like gypsum products and OSB are more difficult to circumvent.
As builders adjust to higher costs, expect new home construction to continue to slow in 2017.
In 2016, SFR construction rose 12% over the previous year in California, while multi-family construction decreased 4% from 2015. With residential vacancy rates at extreme lows, residential construction needs to pick up to meet demand, or else the meteoric rise in rents relative to incomes will become catastrophic for California residents. And yet construction continues to meet new obstacles.
To help new construction along, local governments can loosen zoning and overhaul CEQA to reduce the costly permitting process. Of course, this is much easier said than done.
Agents and builders can get involved by attending local city council meetings and letting their voices be heard.