Housing Construction Booming For How Long With a Trade War?

The Mortgage Corner

How is it possible the 10-year Treasury yield has fallen back to 2.88 percent, and the 30-year fixed conforming rate is again 4.0 percent for 1 origination point in California? It’s all because the Trump trade wars that are supposed to be “easy to win” have alarmed financial markets so much that investors are fleeing back to the safe haven of Treasury bonds. Really? Why should this bother financial markets when trading partners reciprocate with higher import taxes of their own on American-made goods?

That’s right, a tariff is a tax on goods made or bought by Americans, whether it’s exports or imports. So much for the Republican’s promise of no new taxes, which even Republican orthodoxy says raises prices and reduces demand for those goods and services.

The housing market doesn’t seem to mind, at the moment. Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,350,000, said the US Census Bureau today. This is 5.0 percent above the revised April estimate of 1,286,000 and is 20.3 percent above the May 2017 rate of 1,122,000. Single-family housing starts in May were at a rate of 936,000; this is 3.9 percent above the revised April figure of 901,000. The May rate for units in buildings with five units or more was 404,000.

Graph: Econoday

The gain for completions is entirely centered in the key single-family category, up 11.0 percent to 890,000 to offset a 13.8 percent decline for multi-units.The May reading of 1.35 million is the number of housing units builders would begin if they kept this pace for the next 12 months, said the NAHB press release. Within this overall number, single-family starts rose 3.9 percent to 936,000 – the second highest reading since the Great Recession. Meanwhile, the multifamily sector -- which includes apartment buildings and condos -- rose 7.5 percent to 414,000 units.

"Ongoing job creation, positive demographics and tight existing home inventory should spur more single-family production in the months ahead," said NAHB Chief Economist Robert Dietz. "However, the softening of single-family permits is consistent with our reports showing that builders are concerned over mounting construction costs, including the highly elevated prices of softwood lumber."

And that leads us back to Trump’s problem with “easy to win” trade wars. The NAHB leadership just met with Commerce Secretary Wilbur Ross to discuss the growing problem of escalating lumber prices that are being exacerbated by tariffs on Canadian lumber imports into the U.S.

"Today, we discussed with Secretary Ross our mutual concern that lumber prices have risen sharply higher than the tariff rate would indicate,” said NAHB Chair Randy Noel, “and this is hurting housing affordability in markets across the nation. Rising lumber prices have increased the price of an average single-family home by nearly $9,000 and added more than $3,000 to the price of the average multifamily unit.”

I wonder who is promising that prices in the free market are predictable when a trade war is initiated? It is the height of folly to promise beneficial results when past history has said trade wars harm almost everyone involved.

Harlan Green © 2018

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