Tuesday, July 18, 2017

Housing and Policy

by Bill McBride on 7/18/2017 01:41:00 PM

The NAHB Builder confidence survey declined this morning (although still solid), and the NAHB blamed the rising prices, especially for lumber. As Diana Olick noted on CNBC:

Builder confidence jumped 6 points from November to December (63 to 69) and then jumped again to 71 in March, following the administration's repeal of certain environmental regulations specifically involving water.

Now, new tariffs on Canadian lumber of up to 24 percent announced by the Trump administration in May, as well as the expectation of additional tariffs on other homebuilding materials imported from overseas, are overtaking the benefits of deregulation. The cost of framing lumber has spiked in recent months and continues to rise today, which only exacerbates already rising prices for land and skilled labor.
Those tariffs are impacting lumber prices.

Lumcber PricesClick on graph for larger image in graph gallery.

This graph shows two measures of lumber prices: 1) Framing Lumber from Random Lengths through June 2017 (via NAHB), and 2) CME framing futures.

Right now Random Lengths prices are up 14% from a year ago, and CME futures are up about 18% year-over-year.

And immigration policy will likely slow household formation. Housing economist Tom Lawler wrote an excellent article last month: Lawler: Reasonable Population Projections Are Important!. Here are some excepts (look at the table and see how important immigration is for household formation).

From Tom Lawler:

[B]elow is a table of what labor force growth and US household formations would be under each scenario if (1) labor force participation rates by age remained constant at 2016 levels; and (2) household headship rates by age remain constant at my “best guess” rates for 2016 (there are no good, reliable data on households since 2010, but that is a different story!). I realize, of course, that holding labor force participation rates and headship rates by age constant is not a “best guess” projection, but I’m just trying to show sensitivities to different population assumptions.
Annual Growth Rate in the US Labor Force Assuming Constant Labor Force Participation Rates by Age
Zero Net International Migration0.04%0.02%-0.01%
NIM of 700,000/year0.28%0.27%0.24%
Census 2014 Projections0.50%0.50%0.48%
US Household Growth Assuming Constant Headship Rates by Age
Zero Net International Migration1,026,077966,155924,937
NIM of 700,000/year1,231,9951,180,9161,148,645
Census 2014 Projections1,485,2781,455,6151,442,362
As the table suggests, analysts using the extremely dated Census 2014 population projections would conclude that the US would have “decent” labor force growth and quite strong US household growth over the next three years. Contrary to what some analysts suggest, however, that strong growth is not in the main the result of the current “demographics” of the population, but rather is mainly the result of what are now clearly unrealistically high assumptions about net international migration. If instead the US had zero net international migration of the next three years, the US labor force would show no growth unless labor force participation rates increased, and US household growth would average less than one million per year unless headship rates increased. Not surprisingly, a “sorta Trumpy” scenario of net international migration of 700,000 a year – probably the closest there is a a “base case” scenario” produces projections about half way in between these two extremes.
From a policy perspective, it is possible that deregulation could give a boost to housing (and also changes in local ordinances), but the current trade and immigration policies are a net negative for the U.S. economy and especially housing.