As the U.S. adopts a tougher stance with regards to its trading partners around the world, the shifts in trade policy are putting greater strains on an already inventory-starved real estate market and driving up home prices, according to a trio of real estate economists.
Since the start of 2017, tariffs — even just the talk of tariffs — have been one of the driving forces behind a 50 percent surge in lumber pricing and that alone has led to a price increase of $9,000 for the average new home, according to David Logan, director of tax and trade policy analysis at the National Association of Home Builders (NAHB).
“Lumber is easily the no. 1 material input into new-home construction and the price of that lumber has gone up roughly 50 percent since the beginning of 2017,” Logan told Inman. “Talk about the primary input of any sector’s good climbing by 50 percent over the course of 18 months, and it will throw a dent into anyone’s business, and that surely is the case for homebuilders.”
The lumber tariffs ‘perfect storm’
Logan said the rising prices are squeezing profit margins and some homebuilders have had to raise prices against their own desires, which shrinks their market and forces them to change their business strategy.
An estimated 150,000 prospective homebuyers are priced out per every $1,000 increase, according to Logan. By that math, 1.35 million homebuyers have been priced out, in part, by rising lumber costs for which the tariffs are partly responsible, Logan said.
“The tariffs have created the perfect storm not just for builders but for prospective homebuyers,” he said.
The Trump administration first announced lumber tariffs for Canadian lumber entering the U.S. back in April 2017 and then announced additional tariffs in June of that year. Logan said there have been other forces that have driven up lumber prices — such as the wildfire season both domestically and in Canada and transportation issues with the supply chain — but those have been ephemeral.
“The constant to this as prices have continued to climb have been the tariffs,” Logan added.
The inventory conundrum
Lawrence Yun, the chief economist at the National Association of Realtors (NAR) told Inman that the housing market has been plagued by low inventory over the past few years, and as the tariffs slow homebuilding activity, that will put an even bigger crunch on prices throughout the market.
“[Low inventory] has become an issue which is consequently pushing up home prices above people’s income growth by large amounts, and it’s not healthy,” Yun said. “We need to have more inventory into the marketplace, and one clean way to build inventory is from homebuilding activity.”
“Certainly [tariffs] will raise the cost of production, which means some builders will be less aggressive about how much additional supply they want to bring onto the market,” he added. “They will be asking the question: Can they pass on that cost to the consumer or not?”
Yun noted that it’s not just tariffs and the cost of land that’s driving up prices but also a shortage of skilled labor in the homebuilding sector, high land costs and regulatory barriers.
Housing starts in May reached the highest level in over a decade, however, the U.S. Bureau of Labor Statistics and the U.S. Department of Housing and Urban Development reported a month-over-month decline in permits for new construction.
Overall, the economy is also strong but could be even stronger with more homebuilding activity, Yun said, adding that the tariffs are impacting the country’s gross domestic product (GDP).
“The lumber tariffs are just an unnecessary, unforced error from a policy standpoint,” Yun said.
A more challenging trading environment looms
Sarah Mikhitarian, an economist from real estate portal giant Zillow, explained that lumber accounts for about a third of the price of a new home and that the costs of the tariffs are largely being passed onto the consumer. A lot of existing, for-sale inventory is already at a higher price point too, so it’s the lower-priced housing market that will be particularly impacted by the lack of new construction.
In May of this year, Trump also announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from Canada, Mexico and the European Union. Canada and the European Union have responded with tariffs on U.S. exported steel and aluminum of their own. Mikhitarian said these tariffs will increase the costs of multifamily construction.
“Buildings that use a lot of steel and alumium are going to be much more expensive,” Mikhitarian said.
Right now there’s a lot unknown with regards to how this current climate may escalate. Quartz countertops coming from China are one product to keep an eye on, she said.
“The next step of escalation is unknown and could be a larger scale and that could have a bigger impact on housing,” Mikhitarian said.
Homebuilding companies Lennar and D.R. Horton did not respond to a request for comment.