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Zillow Research

Softwood Lumber Tariff Could Lift New Home Premiums by $2,000

An announced 20 percent tariff on Canadian lumber imports could cost buyers of new homes thousands of dollars in added materials costs, according to a Zillow analysis of lumber and home prices over time.

new home sales

An announced 20 percent tariff on Canadian lumber imports could cost buyers of new homes thousands of dollars in added materials costs, according to a Zillow analysis of lumber and home prices over time.

A 5 percent monthly jump in lumber prices – similar to that experienced earlier this year when lumber suppliers began anticipating changes in lumber import policies – results in as much as an additional $2,000 premium on new homes relative to existing homes.

Softwood lumber, including pine and spruce, is an important material used in the construction of new homes. Over the past two decades, there has been a statistically significant relationship between changes in softwood lumber prices and the price premium newly constructed homes command over existing homes (figure 1).

Over this period, a 1 percent monthly change in the producer price index for softwood lumber is associated with a 0.6 percentage-point widening of the gap in median sales prices of new homes over existing homes.[1] A 5 percent month-over-month change in softwood lumber prices is associated with a roughly $1,600 to $2,000 increase in the new home price premium. A 5 percent monthly jump in lumber prices is relatively rare,[2] but not unheard of, and is in in line with gains observed as recently as February – when lumber wholesalers first began to anticipate the possibility of a tariff and adjusted prices accordingly.

lumber tariff

Of course, many factors drive the gap in median sale prices between new and existing homes, and the price gap widened over the course of the recent recession even as lumber prices fell or stayed flat. And it’s likely some home builders may have already locked in lower lumber prices for planned construction in the coming months, and/or may turn to other, cheaper building materials. But if the tariff remains in force, American consumers should expect to see higher new home prices sooner or later.

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[1] We regress the percent gap between non-seasonally adjusted median prices of new and existing homes on the month-over-month percent changes in the non-seasonally adjusted producer price index for softwood lumber over the period January 1995 through March 2017. The parameter associated with changes in the softwood lumber PPI is statistically significant at the 95 percent confidence level.

[2] A 5 percent monthly gain in lumber prices represents roughly the 93rd percentile of month-over-month changes historically.

Softwood Lumber Tariff Could Lift New Home Premiums by $2,000