Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, April 4, 1993 TAG: 9304050266
SECTION: HOMES PAGE: E-1 EDITION: METRO
SOURCE: DAVID MACE KNIGHT-RIDDER/TRIBUNE
DATELINE: KANSAS CITY, MO. LENGTH: Long
LUMBER PRICES' EFFECTS ON HOUSING DEBATED
Record U.S. lumber prices have sparked debate among analysts on whether housing starts and the economic recovery could be jeopardized by the added cost of building a new home.Interest rates have hovered near historically low levels, which normally would encourage greater numbers of Americans to build homes. But some home builders say the greater expense of building a home caused by higher lumber prices will turn off potential buyers.
"I've had home builders tell me they've had people ready to buy a house, then the price has gone up because of lumber costs and the people have declined to buy," said Michael Carliner, staff vice president of economics and housing policy for the National Association of Home Builders. "Lumber prices may not completely outweigh lower interest rates, but they largely remove incentive."
Lumber prices have climbed 90 percent to $475 per 1,000 board feet from $250 in October. Many analysts attribute the huge increase to supply concerns caused by environmental restrictions placed on timber harvest in the Pacific Northwest.
February housing starts climbed 2.5 percent to a seasonally adjusted annual rate of 1.208 million units from a revised rate of 1.178 million in January. But the number was significantly lower than the rates of 1.286 million units in December and 1.285 million in February 1992.
Building permits fell 3.1 percent in February to a seasonally adjusted annual rate of 1.144 million units from 1.180 million in January. Many economists blamed unfavorable weather for the decline, but some members of the housing industry are concerned the retraction may become a long-term problem if lumber prices do not ease.
Dan Star, division president of Pulte Home Corp., estimated the higher lumber prices added $8,000 to the price of a $140,000 home. Other estimates ranged from increases of $4,500 to $10,000, depending on the size of the home.
Increased housing demand is related directly to economic recovery, and higher lumber prices could limit the number of new buyers, Carliner said.
"A 1 percent drop in interest rates could add as many as 300,000 buyers of new and existing homes," he said. "But we estimate increased lumber costs could eliminate 127,000 buyers who would not qualify at the higher cost. The number would be larger if you include those who can afford it," but elect not to buy at higher prices.
But Matt Lyman, publisher of the Pine Page, a market newsletter in Burlington, N.C., challenged the view that lumber prices have erased the Lumber prices may not completely outweigh lower interest rates, but they largely remove incentive. Michael Carliner Vice president, National Association of Home Builders. advantage of bargain-basement mortgage rates.
In a recent issue, he stated mortgage payments, when adjusted for higher lumber prices, actually have fallen since the rally began.
His scenario compares the financing cost for a Charlotte, N.C., home builder to construct a $130,000, 2,200-square-foot home in November, compared with the cost in February of $138,000 to build the same home.
Lyman used an interest rate of 8 5/8 percent for November vs. 7 1/2 percent for February, and assumed the home buyer financed 80 percent of the cost. The November balance to finance the home came to $104,000, while the February figure was 110,000.
However, with the difference in the interest rate, Lyman found the monthly mortgage payment on a 30-year fixed-rate mortgage for the home financed in November was $803.12 per month, compared with $767.13 for the home financed in February.
Lyman said his clients in the lumber industry, especially private owners of timber, have received undue criticism, including charges of price gouging.
"A lot of what you hear from home builders is the lumber industry is gouging them, when [higher prices] are a natural, direct result of supply and demand," Lyman said. "These guys will charge what the market will allow. Commercial building and development has been good in many areas, so the landowners are charging more. Why not attack them?"
But while mortgage payments still might be lower, NAHB's Carliner said a larger down payment was the biggest turn-off to new home buyers. "For most home buyers, the monthly payment is not as important as the ability to afford the down payment," he said.
David Seiders, chief economist for NAHB, also said falling interest rates did not positively affect the down payment. And, "if lumber prices keep increasing at a fast rate, we can't expect home buyers to blithely accept higher home prices without making some sacrifices," he said.
Such sacrifices could come in the form of construction of smaller houses with fewer amenities, Seiders said.
A study by the Congressional Research Service, issued March 10, said history suggests rising lumber prices probably will not constrain housing starts. The report said lumber prices rose 73 percent from 1973 to 1978, while housing starts rose 74 percent to 2.02 million from 1.16 million units. Similarly, lumber prices climbed 31 percent between 1982 and 1983, while housing starts rose 60 percent to 1.70 million from 1.06 million units.
Also, the paper said, "doubling the price of lumber increases mortgage payments by less than $40 per month," on a 30-year mortgage with a fixed rate of 9 percent for a $100,000 home. Given this effect, it "seems unlikely that changes in lumber prices can have a significant effect on housing demand."