The Impact of Tariffs on Homebuilding Costs
In June 2023, a new housing development was underway in Lemont, Illinois, reflecting ongoing trends in the American real estate market. Yet, beneath the surface of this activity lies a potential challenge stemming from incoming tariffs imposed by the Trump administration. The National Association of Home Builders (NAHB) estimates that these tariffs could add an additional $10,000 to the cost of constructing an average new home.
Effects of Tariffs on Material Costs
The NAHB reports anecdotal evidence suggesting that the upcoming tariffs on imports from Canada and Mexico could inflate prices for essential building materials such as softwood lumber and drywall components. Preliminary estimates indicate that these tariffs may increase the cost of constructing a single-family home by between $7,500 and $10,000. As stated in a recent blog post by the NAHB, “In effect, the tariffs act as a tax on American builders, home buyers and consumers.”
The proposed 25% tariffs on materials from Canada and Mexico are projected to boost costs of imported construction materials by over $3 billion, impacting not just builders, but consumers as well. Products such as gypsum, essential for drywall, often come from Mexico, while a significant amount of softwood lumber is imported from Canada. Furthermore, materials like steel and aluminum, as well as various home appliances, are primarily sourced from China, all of which are also subject to increased tariffs.
Reactions from the Homebuilding Sector
Homebuilders are understandably concerned about how these tariffs will impact their operations and profit margins. The SPDR S&P Homebuilders ETF (XHB) has seen a decline of more than 22% since late November amid rising uncertainties associated with these tariffs and overall market volatility. Many builders, such as D.R. Horton, rely heavily on Canadian lumber—about 20% of their materials—which underscores the urgency to reassess supply chains in light of potential new taxes.
Jessica Hansen, head of investor relations at D.R. Horton, explains, “There’s really no way to proxy what that could ultimately cost, but we’ll navigate it like we do anything. If we’ve got a cost category that’s inflating and we’re in a gross margin compressing environment, we’re going to renegotiate anything and everything that we can.”
Diverse Impacts on Local Builders
While larger firms dealing with international imports are grappling with the effects of tariffs, local builders such as K.B. Home also face challenges. Chief Operating Officer Robert McGibney highlighted that even with sourcing a “majority” of materials domestically, the elevated tariffs can drive up prices across the board. As demand for American-made materials increases amid tightening supply chains, costs may rise for those who typically rely on local suppliers.
The ongoing discussions about tariff policies have ignited broader conversations about the housing market, particularly in border states. Economists are cautioning that Trump’s immigration policies could further complicate the already tight labor market for construction workers, exacerbating existing issues that builders are facing.
Looking Ahead
As the housing market continues to navigate these challenges, experts are keeping a close eye on the evolving tariff landscape. Ali Wolf, the chief economist for housing data provider Zonda, projects that tariffs could raise construction material costs by anywhere from 6% to 14%. She also notes the significance of the broader economic environment, as the administration’s push for deregulation may offer some advantages that are countered by the negative implications of tariffs and immigration policy.
“With that being said, when you look at some of the policies — tariffs, immigration, interest rates — all of these disproportionately negatively impact our industry,” Wolf stated. As builders plan for the future, a comprehensive understanding of both local and national policies will be critical in determining their strategic responses and overall operational viability.