The Rising Cost of Building: How Tariffs Impact Home Construction and Affordability

This story was originally published at Real Estate News.

Housing affordability has become an increasingly critical concern for prospective homeowners across the nation. A confluence of factors, including limited housing supply and sustained demand in many urban and suburban areas, has contributed to this challenging landscape. Adding to these existing pressures is the growing influence of tariffs on imported building materials, a factor that is significantly exacerbating the affordability crisis.

Tariffs, essentially taxes imposed on imported goods, directly inflate the cost of essential materials used in residential construction. Key among these are lumber, a substantial portion of which is sourced from Canada and has a history of being subject to tariffs . Steel and aluminum, vital for structural components, appliances, and HVAC systems, are also frequently targeted by these trade policies . Furthermore, tariffs can extend to other crucial materials like concrete and household fixtures, further compounding the problem . A recent report from CoreLogic projects a potential 4-6% increase in building material costs in the near term due to proposed tariffs on imports from Canada and Mexico, with an even broader estimate suggesting an overall rise of 10% in building material expenses within the next year . This increase is further substantiated by findings indicating that construction costs could rise by a similar 4-6%, potentially adding a significant $17,000 to $22,000 to the price tag of a new home . The reliance of the U.S. housing market on imports for materials such as lumber and gypsum makes it particularly susceptible to the impact of tariff policies affecting key trading partners like Canada and Mexico . Even temporary suspensions of these tariffs can introduce uncertainty into the market, making long-term planning more difficult for builders .   

The increased expenses faced by builders due to tariffs are not typically absorbed; instead, they are often passed on to homebuyers in the form of higher prices . This direct transmission of cost directly undermines housing affordability, rendering homeownership an even more distant prospect, particularly for individuals and families entering the market for the first time . The potential addition of $17,000 to $22,000 to the cost of a new home, as indicated by multiple sources, illustrates the substantial impact tariffs can have on the final price . Experts like Pete Carroll from CoreLogic have emphasized the growing challenge for builders to construct homes at price points attainable for lower- and moderate-income residents while still maintaining profitability .   

Beyond the immediate price increase, rising construction costs stemming from tariffs can also dampen the enthusiasm for new construction projects by squeezing builder profit margins . This potential slowdown in building activity would exacerbate the already significant shortage of housing supply across the United States, estimated to be in the millions of units . While some might argue that tariffs could incentivize a shift towards domestic sourcing of building materials, this transition is not without its challenges. A sudden surge in demand for domestic materials could strain existing supply chains and potentially lead to short-term price increases, mirroring some of the market dynamics observed during the pandemic . The interplay between tariffs, construction costs, and housing supply creates a scenario where reduced building profitability can lead to fewer new homes, further constricting supply and potentially driving up prices in the existing housing market – a cycle that further diminishes affordability.   

While the precise impact of tariffs can be complex and subject to various market factors, the consensus among experts suggests a tangible negative effect on both construction costs and overall housing affordability. CoreLogic's projection of a 4-6% increase in construction costs due to tariffs provides a likely near-term scenario . However, it is important to note that other organizations, such as the National Association of Home Builders (NAHB) and John Burns Research & Consulting, offer slightly different estimates, highlighting the inherent complexities in forecasting the precise economic consequences . Regardless of the exact figure, the overarching trend indicates a significant upward pressure on the cost of building materials, with some estimates suggesting a potential overall increase of 10% within the next year .   

In light of these challenges, there is a growing emphasis on identifying potential solutions to mitigate the negative effects of tariffs on housing affordability. One prominent area of focus is regulatory reform at the federal, state, and local levels . Experts like Robert Dietz, chief economist at NAHB, argue that streamlining regulations related to land development, home construction, and remodeling has become even more critical in the face of rising material costs . Examples of such reforms include expediting permitting processes, re-evaluating zoning regulations to allow for more diverse and higher-density housing options, and addressing inefficiencies within environmental regulations . While increasing domestic production of building materials is a long-term goal, the immediate capacity limitations, particularly for lumber, suggest that this alone may not fully offset the impact of tariffs . Encouraging more efficient land use and promoting higher-density development also remain important strategies for increasing housing supply and potentially moderating costs .   

In conclusion, tariffs on imported building materials represent a significant headwind for housing affordability, poised to drive up construction costs and ultimately increase the price of new homes. For real estate consultants, understanding these economic factors is crucial for providing informed guidance to clients navigating the complexities of the housing market. Staying abreast of ongoing developments in trade policy and potential regulatory responses will be essential for effectively advising on buying, selling, and investing in real estate in this evolving environment.