The Impacts of New Tariffs on the Housing Market

by James SheaOctober 25, 2018

In late 2017, the Commerce Department announced a 21% tariff on lumber products imported from Canada in the United States. The department followed up with lumber tariffs with tariffs on steel and aluminum in early 2018. The Trump Administration wants to protect domestic wood, steel, and aluminum producers, and claims the tariffs are a matter of national security.
Transportation of aluminum for export.
“We take the view that without a strong economy, you cannot have strong national security,” Commerce Secretary Wilbur Ross said at the time.

Steel, lumber and aluminum are major components in residential construction and the tariffs have had a major impact on the housing market, especially new constructions. The cost of home construction materials has increased significantly in recent months, and the real estate industry is concerned about the long-term ramification of the tariffs on the housing industry.

“It’s a self-inflicted wound,” said David Arbit, director of research and economics for the Minneapolis Area Realtors. “Our political world is supposed to help home buying. This feels like just the opposite.”

National Association of Realtors Chief Economist Lawrence Yun is forecasting a one percent decline in home sales in 2018, and a downward trend in 2019. He believes the tariffs will have a direct impact on the housing market, because they increase the cost of new construction.

“Rising material costs and labor shortages do not help builders to be excited about business,” Yun said. “But the lumber tariff is a pure, unforced policy error that raises costs and limits job creations and more home building.”

New Home construction

The National Association of Home Builders has opposed the tariffs. The association says the tariffs have increased the cost of constructing a single-family home $9,000 and $3,000 per unit on a multi-family project.

Housing prices have already increased drastically over the last few years, and the Home Builders association is concerned that the added cost will put home ownership out of the reach of some people. Builders says they can absorb some but not all of the costs.

New home under construction with wood trusses and supplies against blue sky.

“Builders remain largely confident because the economy is solid and demographics point to continued demand,” said NAHB Chairman Randy Noel. “However, affordability continues to be a concern for both builders and buyers.”

The association has been lobbying the administration to reduce or eliminate the tariffs. It believes that affordable building materials from the United States as well as other countries is vital to a strong home construction industry.

“All these tariffs are adding up to major increases for us,” said Dallas custom home builder Jeff Dworkin. “It’s hard to even guess right now what your lumber prices are going to be for a job. Lumber companies are only giving us 30-days notice at best to rising prices.”

On average, a single-family home uses $60,000 worth of wood products. It’s the largest element of a new home. Steel is a major building material for high-rises and multi-family dwellings. Combined, the tariffs are impacting the industry.

“Steel prices affect multifamily, single-family construction and remodeling, as well as appliances and components,” said Robert Dietz, chief economist of the builders association. “Tariffs acts as a tax on home buyers and renters by increasing the cost of building and improving housing.”

The construction industry is starting to show signs that the tariffs are having an impact. In August housing permits, a sign of future construction activity, declined 5.7 percent. Single-family unit construction permits were down 4.9 percent. Dodge Momentum Index, which measures future construction activity, declined in August and September.

“For a couple of years, the big concern with builders was all about labor,” said Ted Wilson, principal with Dallas-based housing analyst Residential Strategies Inc. “This year, it’s been all about materials prices. If you combine that cost increase along with the move in the 30-year mortgage rate, that exact same house you were buying at the first of the year, the monthly payments are now about 10 percent higher.”

On a positive note, housing starts increased 9.2% in August to a seasonally adjusted annual rate of 1.28 million units, according to the U.S. Department of Housing and Urban Development and the Commerce Department. The western part of the country led the nation in housing starts with a 19.1% increase in single-family and multi-family housing in August.

Remodeling

People who are looking to remodel a home or buy new appliances are also impacted by the tariffs. The Trump Administration has announced tariffs on thousands of items from China, and 463 are items used in residential construction and remodeling, according to the National Association of Home builders The list contains items such as vinyl flooring, granite, ceramic tiles, nails, socket wrenches, and wall fixtures. The tariffs start at 10% but increase to 25% on Jan 1.

The administration says the tariffs are leverage to address trade concerns between the two countries, but they could have a direct impact on whether some homeowners move forward with a remodeling project. Contractors say that prices are so unpredictable that they are having a hard time pricing a job. Many have placed escalation clauses in the contract to account for the volatile prices, but the move has caused some homeowners to be reluctant to remodel a home.

Framed exterior wall going up on addition for existing home.

Besides the construction supplies, washing machines, stoves and other appliances imported from China could be impacted by the tariffs. A recent study by the National Retail Federation said costs for large ticket items could increase 2% to 4% because of the tariffs.

“The costs of higher producer prices are eventually passed along to consumers,” remarks Dan Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute.

Decline in foreign buyers

One other potential impact on the housing market of the tariffs is the decline of foreign buyers. In places like Miami and New York City, foreign buyers have been a major driver of the housing market in recent years. For example, Chinese investors purchased $39.7 billion in US real estate in 2017.

Some analysts have speculated that the tariffs could spook foreign buyers. The Chinese and other foreign buyers of US real estate might reconsidered a real estate purchase after seeing the aggressive stance the administration has taken against their home countries. Foreign investment by Chinese buyers is already down 30%.

“The decline is partly coming off high levels of the prior year, but also surely from the strong rhetoric coming out of Washington against foreigners,” said Yun, chief economist for the realtors. “There has been a large drop-off in foreign students attending US universities already. Chinese [buyers], in particular, purchase homes for their kids while attending college.”

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About The Author
James Shea
James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.