Home builders warmed to President Trump’s return initially, especially promises to gut regulations that push up construction costs. But six weeks into his second term things aren’t going to plan for the industry, or America’s squeezed home buyers.
Tariffs on Mexican and Canadian imports that came into force this week will make it more expensive to build housing. Around 8% of the materials used to construct a new home are imported from outside the U.S., the National Association of Home Builders estimates. This includes everything from Canadian softwood lumber used for door frames and decking, to refrigerators from Mexico.
Some materials, such as lumber, qualify for the one-month delay announced Thursday. Based on initial conversations with builders, NAHB Chief Economist Robert Dietz estimates the tariffs, once fully phased in, will add anywhere from $7,500 to $10,000 to the cost of building the average American family home.
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In a more normal housing market, this would be passed on to consumers. But now is a bad time to ask buyers to pay more. Both home prices and mortgage rates are high, so affordability is stretched.
The lead into the crucial spring home buying season has been weak, with January sales of new single-family homes down 10.5% compared with December, on a seasonally adjusted annual rate. Proxies for future demand, such as the number of people actively viewing properties, are soft too, according to Rick Palacios, director of research at John Burns Research and Consulting. Buyers look tapped out even before the impact of tariffs is felt.
Based on the recent severe underperformance of the iShares U.S. Home Construction ETF, investors expect builders to swallow the higher costs of doing business and suffer lower profit margins as a result. Shares in the fund rallied 6% in the three weeks after the election, but are down 21% since then, compared with a 4% drop for the S&P 500 over the same period.
There may be more pain on the way from the administration’s immigration policies. Construction sites look ripe for immigration-enforcement raids as home builders rely heavily on unauthorized workers. Half of ceiling-tile installers and 37% of roofers are undocumented, according to John Burns estimates. A crackdown that shrinks the pool of workers could push up construction pay, which is already rising faster than wages in the wider economy.
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Aggressive tariff announcements, followed by jarring U-turns on their implementation date, are a nightmare for the industry. Builders need to be sure about policies when they make investment decisions, as the timespan between buying land to completing a housing development can be three years or more.
Seasonally adjusted annual new housing starts fell 10% in January compared with December, data from the Census Bureau shows. Home builders are being cautious as they already have a glut of finished inventory they are struggling to sell. Tariffs will give them another reason to hit the brakes. This is a bad sign for the U.S. housing market, which needs more supply to bring prices back down to more affordable levels.
The one relief for home hunters is that mortgage rates have fallen slightly in recent weeks. The rate on a 30-year mortgage dropped to 6.63% this week from 7.04% in mid-January, according to Freddie Mac. However, this probably reflects worries about how the U.S. economy will respond to more protectionist trade policies that have pushed down the 10-year Treasury yield. A weak economy won’t help housing affordability if it means lower incomes for buyers.
Policy upheaval could hit renters, too. Rent growth has been anemic over the past year because of a glut of newly built apartments. If tariffs discourage construction, landlords could regain the upper hand as supply tightens. They think there is scope to push rents higher as tenants currently spend a lower share of their incomes on housing costs than homeowners.
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“The real story on tariffs and immigration is less supply, which is favorable for rent growth,” says Cedrik Lachance, director of research at real estate analytics firm Green Street.
The Trump administration could eventually remove some of the pain caused by tariffs by cutting red tape for builders. For now, the direction of travel is disappointing. The White House’s new occupant is raising rather than lowering costs in America’s troubled housing market.