New tariffs could raise home prices and sideline potential buyers

February 3, 2025

Published Mon, Feb 3 2025 1:45 PM EST

The U.S. housing market was already struggling under the weight of high mortgage interest rates, a low supply of existing homes for sale and historically high home prices.

Now tariffs on building materials are adding even more pressure.

About 30% of softwood lumber consumed in the U.S. is imported, largely from Canada. Wallboard, known as gypsum, is imported from Mexico. The 25% tariff President Donald Trump levied on goods from the two key trading partners will make those products that much more expensive. The Mexico tariffs were postponed Monday for a month, but they are still on the table.

"More than 70% of the imports of two essential materials that home builders rely on — softwood lumber and gypsum — come from Canada and Mexico, respectively," Carl Harris, chairman of the National Association of Home Builders, wrote in a release. "Tariffs on lumber and other building materials increase the cost of construction and discourage new development, and consumers end up paying for the tariffs in the form of higher home prices."

Home prices are already up well over 40% since the start of the pandemic and were still 3.8% higher in November, compared with the previous November, according to the latest read from the S&P Corelogic Case-Shiller national home price index. That annual increase was higher than the 3.6% in October.

Duties on building materials could make the market even harder for buyers.

"We believe this could make worse the affordability crisis for first-time buyers," wrote Jaret Seiberg, housing policy analyst for TD Cowen Washington Research Group. "On the plus side, it could increase pressure on Congress to enact policies that encourage more entry-level construction including expanded tax credit programs."

Prospective home buyers leave a property for sale during an Open House in a neighborhood in Clarksburg, Maryland.

The NAHB is asking the Trump administration to exempt building materials from the 25% tariffs, noting his executive order on the first day of his presidency that sought to "expand housing supply."

While the U.S. has ramped up lumber production in recent years, 70% of the country's sawmill and wood product imports — $8.5 billion — come from Canada. They are already subject to a 14.5% tariff, so Trump's new policy would raise it to over 39%.

And 71% of lime and gypsum product imports are from Mexico, totaling $352 million. Other materials, such as steel and appliances, are sourced from China. Trump put an additional 10% tariff on goods from China on Saturday.

New duties on imports from China, Canada and Mexico could raise construction material costs by $3 billion to $4 billion if they all take effect, affecting builders' ability to complete projects, according to the NAHB.

The tariffs are likely to hit smaller homebuilders with tighter margins harder, but big builders are not immune.

"Even with a smaller portion of our lumber coming from Canada, and some materials from Mexico, we will all be affected — which, in turn, can impact consumers and their ability to purchase a home in the short-term," said Sheryl Palmer, CEO of Arizona-based homebuilder Taylor Morrison. "In a time where some consumers are still struggling to overcome higher interest rates, my sincere hope is that these will be short-lived."

Builders are already contending with a labor shortage that is only getting worse after the Trump administration started mass deportations of undocumented immigrants. Roughly 30% of construction workers are estimated to be immigrants, and a significant share of those workers are undocumented, according to the National Immigration Forum, an immigration advocacy group.

"You can run them all out of the country, but who's going to build houses?" said Bruce McNeilage, CEO of Nashville-based Kinloch Partners, a single-family rental home developer.

While the bulk of the effect of tariffs is on new housing construction, the existing market could also feel the effects. If the costs of other consumer goods increase, all potential buyers will have less spare cash to save for a down payment.

There was also an expectation that interest rates would fall this year, but if inflation heats up again due to the tariffs, rates could even rise. This layering of both economic realities and emotional perceptions of personal wealth could hit the all-important, upcoming spring market hard.

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Meeting the Needs of Consumers, Developers and Investors By Bruce McNeilage In early 2022 I made a prediction. The three-bedroom house would die a slow death. What was once a staple of American construction and homeownership has become as outdated as ‘70s floral couches and wood-paneled living rooms. Consumer demand is pushing builders to create more four- and five-bedroom homes. In addition, existing business conditions make four- and five-bedroom homes the best option for developers and investors. As 2022 played out, my prediction came to fruition. Of the more than 1 million homes constructed in 2022, more than half were four bedrooms or more. That is up from just 25% in 1973. Given current demographics, mortgage rates and work-from-home trends, we expect this trend to continue in the foreseeable future. Older Renters, Work from Home, Drives Need for More Spacious SFR Homes From the consumer standpoint, more bedrooms in a Single-Family Rental (SFR) home makes sense. Most families are clamoring for more space. Millennials, the largest demographic cohort, are entering peak child-rearing years and more space is a necessity. Of course, the global pandemic has played a role in shaping housing trends, as well. More people are working from home and need extra space for one, even two, home offices. More than one-third (35%) of workers with jobs that can be done remotely are working from home all the time, according to a new Pew Research Center survey. This is down from 43% in January 2022 and 55% in October 2020 — but up from only 7% before the pandemic. That’s a five-fold increase in people who need – or likely want – more home office space. While many companies are still hoping to bring workers back to the office, the trend seems to have leveled out. Work from home, in one form or another, is now an entrenched part of the working world and it will continue to impact housing decisions for consumers, builders and investors, alike. Even for a family with only two children, a three-bedroom home no longer has the utility needed for the typical family. Many families are caregivers for an aging parent. In fact, according to Pew Research, 23% of US adults are now part of the sandwich generation — people taking care of an aging parent and a child under the age of 18. These people simply want – and need — more bedrooms, whether they are owners or renters. More families are opting to rent today, as well. The typical age to buy a first home has jumped from 33 years old in 2021 to 36 years old today. It is the oldest ever on record for first time buyers, according to the National Association of Realtors. The rising age is a sign that high housing costs and mortgage rates are pushing homeownership out of reach for younger Americans. Mortgage rates have shot up so rapidly that the average monthly payment on a 30-year fixed-rate loan rose by more than $600 in one year, according to the Consumer Financial Protection Bureau. The CFPB says the average payment for a home purchase loan surged more than 46% — from $1,400 per month to $2,045 — over the 12 months ending December 2022. Likewise, the median total of costs and fees for such mortgages spiked almost 22% to nearly $6,000 in the same period. And with mortgage rates rising to decades-old highs this week, the average monthly payment has almost certainly grown in 2023. This is pushing more people to rentals . Additional Bedrooms Drive up Rental Income, Profits for Builders, Institutional Investors From a business perspective, there is almost no reason for a builder or investor to construct or invest in new three-bedroom homes. If a builder has invested in a lot for $100,000, that is a fixed cost. It is not going to change no matter what they build. A 2,200-square-foot house can be configured with three-, four- or five-bedroom options, so why not go for the configuration that brings a higher profit margin? Won’t an extra bedroom cost more, you ask? 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The confluence of demographics (older renters with young families) along with higher home and mortgage costs are pushing more people into high-end rental homes. One key to success is finding cities with growing populations and desirable amenities. Like any real estate transaction, good schools, youth programs, restaurants and entertainment options are important factors. Once you check those boxes, occupancy falls into place. Our occupancy rates are close to 100%, creating positive cash flow, from a demographic of affluent renters with high credit scores. Finally, we anticipate our five-bedroom rentals will add value significantly faster than three-bedroom homes. Whether we hold these assets for one, five or 10 years, the return on our initial investment will be significantly higher with a five-bedroom SFR rental strategy. While no real estate investment strategy is fool-proof, four- and five-bedroom homes show great promise over the next several years. As for the three-bedroom home: You are more likely to see one in the Smithsonian someday. Bruce McNeilage Bruce McNeilage is co-founder and CEO of Kinloch Partners. He has been in the real estate investment business for 33 years, is a national speaker and guest lecturer on the topic of single-family “Built to Rent” (BTR) housing and started his own BTR business in 2005. Kinloch currently owns assets in the MSAs of: Nashville, Tennessee; Atlanta and Augusta, Georgia; and Aiken, Greenville-Spartanburg, and Columbia, South Carolina. Learn more at KinlochPartners.net.