Tariffs' Impact on Home Prices

By Ben Johnson

Tariffs, if implemented, are likely to have a significant impact on the construction industry and the cost of home construction in the United States. The largest expenditure when constructing a home is framing materials, primarily lumber and steel. The majority of the imported lumber used in U.S. home construction comes from Canada and is currently tariffed at a 14.54-percent rate, but this could rise by an additional 25 percent if current tariff exemptions on this product are revoked. Currently, all steel imports coming into the U.S. are charged a minimum 25-percent tariff. The largest providers of steel to the U.S. are Canada, Mexico, and Brazil.

Other major home construction expenditures also rely heavily on imported products to meet demand. Concrete is sourced domestically, but also from Mexico. Roofing materials, siding, windows, and doors can all be sourced domestically, but much of this supply currently comes from Canada and China. Many plumbing and electrical components are imported from China, Mexico, Germany, and Canada, and many HVAC systems are imported from Mexico, China, and South Korea.

The U.S. is imposing a 145 percent tariff on most goods imported from China, 10 percent on goods from South Korea, the European Union, and Brazil, and up to 25 percent on Canadian and Mexican goods that are not specifically excluded from the recently imposed reciprocal tariffs. Many of these tariffs would be even higher if not for Trump's recent 90 suspension of the reciprocal tariffs announced on April 2nd. Given the magnitude of these new tariffs, there is no question that housing will be more expensive to build, maintain, and improve for Americans in the coming months. 

Tariffs on the import of foreign goods and materials could over time make manufacturing in the U.S. more economic relative to importing goods from abroad, which could be good for some industries. But in the short to medium term, these tariffs are likely to drive inflation significantly higher and cause significant disruption to the global supply chain, threatening many U.S. jobs at manufacturers, wholesalers and retailers who rely on the global supply chain to source the components, raw materials, and finished products they sell. Higher tariffs will certainly cause prices to rise for U.S. consumers, as tariffs drive up the cost of the product being imported and these costs must be passed on to the customer.  This threatens not only to spur inflation but may lower overall consumption, slowing the economy. 

What contractors can do to navigate around this:

• Look for domestic substitutes. Fortunately for contractors, most of the materials used to build a conventional home are currently produced in the United States.  Unfortunately for contractors, there is not nearly enough domestic production capacity to meet demand for these materials. In addition, many domestically sourced materials may not be of the same quality as imported items. This is especially true for certain types of wood and stone that can’t be grown or quarried in the U.S. It is also true for some high-end machinery and appliances which are not currently manufactured domestically. As a result, we expect prices to rise and both domestic and foreign produced materials.

• Seek suppliers from lower tariff countries. There is a wide range in the size of the tariffs that have been implemented, leaving room for importers to seek out suppliers in less affected jurisdictions. The European Union for example currently carries only a 10-percent tariff while China’s tariffs stand at 145 percent. While the cost of production in Europe is certainly higher, lower shipping costs and tariffs may make certainly European materials seem affordable relative to similar products from higher tariffed countries.

• Partner with others to place larger orders and obtain volume discounts. Contractors should consider partnering with owners of similar businesses to place larger orders of staple materials. Larger orders may receive discounts on pricing and shipping costs, and if inflation begins to pick up again, having significant inventory on hand may allow a contractor to earn additional income on the up-sell of products ordered in bulk.

• Consider vertical integration. Contractors might consider producing certain materials themselves or working with a local group to form a small production facility to produce staples that are relatively easy to manufacture.

About the author: Ben Johnston, COO of Kapitus, a small business lender and marketplace