LGIH and impact of lumber prices

In 2017, a reasonable estimate for lumber costs to build a new single family residential home is somewhere between $15 to $30 per square foot. For an average sized home, this works out to approximately $35 to $55,000.

Add to this that in late February, 2017 that lumber costs increased 15%, and then today President Trump invoked a 20% tariff on lumber imported from Canada. Assuming a builder uses Canadian lumber, their lumber costs have increased a total of 35% in 2017 this far. This means the lumber costs for the average size home (referenced above) has increased by $7,000 to $11,000 for a total of $42,000 to $66,000.

I live in Minneapolis, MN where the median home price as of today is $237,000, which is a $20,000 increase in the last 3 years. Realizing LGIH does not build in this location, if median home prices increased by this same rate in the locations where LGIH does build, including the increased lumber costs, this would mean the median home price has increased between $27,000 and $31,000 in the last 3 years. Assuming a 4% interest rate and a 30-year term, this is approximately a $270 to $310 per month increase in the mortgage payment.

Question #1 for all to weigh in on: Is an additional $300/month a show stopper for a typical LGIH first time homeowner?

Second question: If yes is the answer to the first question, how does that impact the investment thesis for LGIH?

http://costowl.com/home-improvement/foundations-framing-hous…

Thank you in advance to all for your perspectives.

sjo

Can’t Americans used bricks to build houses with like every other country if lumber prices escalate or is brick too expensive? I’ve never understood why houses in the US are made of planks of wood - very weird. It’s not like America doesn’t have cold winters or tornadoes and stuff.
Ant

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Can’t Americans used bricks to build houses with like every other country if lumber prices escalate or is brick too expensive? I’ve never understood why houses in the US are made of planks of wood - very weird. It’s not like America doesn’t have cold winters or tornadoes and stuff.
Ant

The worst is apartment living. Most of the floors are wood and walls are cheap dry wall. Don’t know how many times having a neighbor below would complain just because you walk across the room. In my last place in San Francisco, I could hear my neighbor’s phone conversation just like if they were in my own apartment. I am not sure the cost differences but am I quite happy with how isolated the condos are in SG from neighbors providing you don’t live with open windows

" Can’t Americans used bricks to build houses with like every other country if lumber prices escalate or is brick too expensive? I’ve never understood why houses in the US are made of planks of wood - very weird. It’s not like America doesn’t have cold winters or tornadoes and stuff."

Great question Ant.
The short answer is yes, however it is cost prohibitive to build a residential home with face brick and block back-up. Doing so would be far better from a longevity perspective. Another consideration would be to use steel studs, however, again, this costs more than framing with lumber by approx. $1.50 per square foot (SF). Now that lumber prices have increased, this would be a logical consideration, but for the fact that construction as an industry is extremely slow to change and crews who frame w lumber are not frequently well-versed with steel studs.

Focusing on the question about if Canadian lumber tariffs threaten the investment thesis for LGIH, and it’s target market if lumber prices increase up to +/- 35% thus far in 2017, what does everyone think? Saul?

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$31,000 at 4% amortized over 30 years is about $148.00 per month.

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$31,000 at 4% amortized over 30 years is about $148.00 per month.

And even that is assuming that ALL lumber used in the US is from Canada, and that all lumber used in the US would rise 20% in price, on top of a 15% rise in price, which sounds extremely unlikely.

Just for starters, the lumber imported from Canada would be diluted by all the lumber coming from the US.

Secondly, the Canadian lumber companies would cut their prices pre-import tax, just to make their lumber more competitive with US lumber. They would thus make less money, but the price of all US lumber would in now way rise that additional 20%!

Just saying.

Saul

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Saul,
You are correct regarding US lumber prices. Nice to see our lumber prices come down instead of having the US lumber barons increase their prices.

http://m.nasdaq.com/markets/lumber.aspx?timeframe=1m

Thank you for your reply and for all you have done to “teach a man to fish” with the generous and selfless sharing of your investment how-to’s. I have been a guest of your board for the past 18 months or so and have come to greatly enjoy following, learning and contributing as I gain knowledge, perspective and am able.

Best and Highest Regards,

Tony (sjo)

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the Canadian lumber companies would cut their prices pre-import tax, just to make their lumber more competitive with US lumber

Not likely. In the past when US tried tariffs Canada increased their exports to China but not cut the price. Also, Canada suffered a massive beetlebee infestation and their timber supply is at an inflection point of falling down significantly. So there is not a lot of incentive for them to cut the price.

Personally I don’t think the tax is going to be a big factor and will be worked away. US, Canada trade is too important and Trump has shown that he will adopt realistic positions and change his positions very fast. The best example of the tariff is not a significant factor is look at the Timber REIT’s, they didn’t move up in price after the announcement. I own, RYN, CTT and follow others. There is no price increase baked in their model or share price.

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