By Mark Sprague, Independence Title Director of Information Capital
Since the economy emerged from the shocks of the pandemic, there is a case to be made that the economy has undergone and continues to undergo a fundamental structural change. Historically low interest rates, policies aimed at bolstering vital national industries, and the influx of foreign capital have all pushed the economy into a new era of faster growth, low unemployment, and higher inflation than desired.
That said, except for inflation, the economy has been in a sweet spot through the end of 2024, with near-record low unemployment, stabilizing rates, and improving wages for most of the year.
As 2025 starts, the new administration has suggested new trade policies and tariffs that may affect those parameters. So, how might these policy changes affect the housing industry?
The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity, and increase global tensions. Other than that, they’re fine.
Historically, tariffs on our exports are met immediately by retaliatory tariffs on our exports by other countries. These would increase prices for foreign consumers and cut output, profits, wages, and employment for U.S. farmers, manufacturers, and commodity producers.
Of course, new tariffs would provide a new source of revenue for our government. However, if these higher tariffs are used to pay for income tax cuts, they would be replacing a progressive form of taxation with a very regressive one. That is to say, income taxes disproportionately impact the rich, and tariffs disproportionately impact the young and the poor.
Below, we break down implications and recommended actions for homebuilders, building products manufacturers, and residential real estate investors.
HOMEBUILDERS
Implications
- Increased material costs: The impact of tariffs on materials like steel, aluminum, glass, oil, and lumber could translate to higher construction costs, making homes less affordable and potentially leading to reduced construction. For example, a 25% tariff on Canadian lumber imports to the United States could increase the cost of lumber by nearly 40%. This could lead to higher housing costs, construction delays, and project cancellations. Let’s look at the numbers:
- The US currently has an effective duty rate of 14.5% on Canadian lumber imports.
- If a 25% tariff is added to the current duty rate, the combined total would be close to 50–55%.
- This could have a significant impact on lumber costs.
- The US relies on Canada to fill the gap in demand for lumber that is not met by domestic production.
- The higher costs of lumber could be passed on to consumers.
- This could make it more difficult for American home builders to build homes that average working families can afford.
- Increased labor costs: For the last five years, the cost of labor and construction has been rising about 10+/-% annually, with 40+% of construction labor in Texas being undocumented. With a larger focus on limiting immigration, labor costs will go up further, driving prices up.
- Higher borrowing costs: If the bond market demands higher yields due to economic uncertainty, borrowing costs for builders and developers will increase, impacting project financing and profitability and, ultimately, housing affordability.
- Reduced demand for higher-priced housing: Higher home prices, driven by increased material and borrowing costs, can dampen demand, leading to slower sales and potential inventory build-up.
- Supply chain disruptions: Trade disputes, even without tariffs, can disrupt supply chains, making it difficult to source necessary materials, delaying projects, and historically driving prices up.
Recommended actions
- Educate policymakers: Seek out ways to engage with officials and educate them on the impacts of proposed policy shifts.
- Diversify supply chains: Find alternative sources for materials to reduce reliance on countries subject to tariffs. However, know that those avenues have been explored in the past, and costs have increased.
- Improve efficiency: Streamline construction processes and adopt innovative technologies to mitigate rising costs.
- Communicate with buyers: Be transparent with potential buyers about the factors driving up home prices.
BUILDING PRODUCTS
Implications
- Increased input costs due to higher domestic costs or products with added tariffs: Building products companies that rely on imported raw materials or components will face higher input costs due to tariffs.
- Reduced competitiveness: If tariffs drive up costs for domestic manufacturers more than for their foreign competitors, historically, they lose market share as buyers look for alternatives.
- Export challenges: Retaliatory tariffs from other countries could make it more difficult for US building products companies to export their goods, which slows business, with no improvement in income.
- Demand volatility: Economic uncertainty and potential slowdowns in the housing market can lead to volatile demand for building products.
Recommended actions
- Assess supply chain vulnerabilities: Identify areas where tariffs could significantly impact input costs and explore alternative sourcing options.
- Invest in automation: Increase automation to improve efficiency and reduce labor costs, offsetting some of the impact of higher material prices. Takes years for completion and approval. Cost increases historically.
- Focus on innovation: To maintain competitiveness and develop new products and technologies that offer cost savings or performance advantages. This takes time.
- Explore export opportunities: Diversify into new markets to reduce reliance on the US market, particularly in regions less affected by trade disputes.
RESIDENTIAL REAL ESTATE INVESTORS
Implications
- Increased housing costs and increased equity of real estate owned: Tariffs and economic uncertainty can lead to higher home prices, making it more expensive to acquire and dispose/sell/exchange investment properties.
- Higher interest rates: Rising interest rates, driven by inflation and/or bond market reactions to economic uncertainty, can increase borrowing costs and yield requirements for investors.
- Rental market impacts: While higher housing costs might increase demand for rentals, economic instability or immigration policy changes could reduce demand.
- Property value uncertainty: Economic uncertainty creates unpredictability in property values, making it harder to assess investment risks and potential returns.
Recommended actions
- Carefully analyze markets. To mitigate economic uncertainty risks, use market-level analytics coverage to focus on markets with strong fundamentals, such as job growth, population, and migration increases.
- Factor in higher costs. Account for potential increases in property taxes, insurance, and maintenance costs due to inflation and supply chain disruptions.
- Consider fixed-rate debt. Securing a fixed interest rate today can help protect against the risk of future borrowing cost increases.
- Diversify investments. Spread investments across different property types and locations to reduce overall risk.
With new tariffs, values will escalate, possibly stalling any significant recovery, which in turn slows down the economy’s growth.
The combination of current growth dynamics and the likely expansionary fiscal policy (i.e., higher spending/increased deficit) adopted this year will slow the pace of growth and support higher interest rates at the long end of the curve.
What does this mean for the market? Historically, we see longer holds on property as equity and buyers reevaluate opportunity. For sellers, costs will increase along with equity. (Historically, tariffs increase costs for the country imposing the tariffs.)
Ultimately, the time to buy is now, while the markets present terms that are more favorable to the buyer before values/costs increase.
The good news is that the Texas region continues to outpace other states and countries in job creation, expanding homeownership opportunities for more buyers.
Please reach out with any questions or concerns.
