Escalating U.S.-Canada Trade Tensions
The trade war between the United States and Canada has intensified, impacting lumber and softwood imports. This escalation could strain American homebuilders and buyers, according to industry experts. Recent negotiations failed to prevent steep tariffs on Canadian exports valued at $20 billion, imposed by the Trump administration. In response, Canada retaliated with tariffs up to 50 percent on various goods starting September 8.
Tariffs target Canadian products such as hockey sticks, apparel, wines, some dairy items, and building materials including cement and plywood. While Canadian lumber is exempt from the new tariffs, it still faces a 35 percent levy from past impositions.
Impact on Home Construction Materials
Joel Berner, a senior economist at Realtor.com, noted the new tariffs on home furnishings and construction materials like plywood and cement, which have a significant effect. However, the uncertainty surrounding future tariff developments poses the real threat. This uncertainty is increasing pressure on the U.S. construction sector, already challenged by rising costs and waning housing demand due to affordability issues.
The National Association of Home Builders (NAHB) warned that these tariffs will elevate housing costs and decelerate construction, affecting both homebuilders and prospective buyers. Daryl Fairweather, chief economist at Redfin, emphasized that tariffs are worsening an already precarious situation by adding substantial costs to home construction.
Rising Costs and Tariff Impact
Since December 2020, building material costs have surged by 40 percent, outpacing inflation rates. Tariffs from the Trump administration have contributed to these rising costs. Prices for building materials excluding energy rose by 5.0 percent in July compared to the previous year, marking the highest change since December 2022.
The U.S. depends heavily on Canadian aluminum and steel imports, which were hit by a 50 percent tariff last year. As a result, prices for metal-based products like siding and trim have increased. These tariffs also impact derivative home building products reliant on aluminum and steel imports.
The U.S. imposed a 10 percent tariff on lumber and 25 percent on kitchen cabinets, resulting in increased construction costs. Canadian softwood lumber faces a 45 percent tariff, impacting U.S. imports.
Effects on Lumber Imports and Housing Market
Lumber imports to the U.S. are declining, with 2023 expected to be at the lowest level since 2014. The latest tariffs will particularly impact plywood, veneer, and engineered wood products. Despite Canada not holding a large share of U.S. imports, it remains an essential supplier of certain building materials.
The rising costs could deter developers from initiating new projects, exacerbating the housing market’s challenges. Joel Berner estimates a housing shortage of over 4 million homes in the U.S., and the tariffs alongside uncertainty complicate builders’ planning processes.
Daryl Fairweather noted that years of underbuilding have contributed to the housing shortage, resulting in more households competing for existing properties.
Challenges for U.S. Domestic Supply
Replacing Canadian materials with domestic supplies in the U.S. isn’t feasible in the short term. The production capacity required would take years and substantial investment to develop. Without long-term assurances on tariff conditions, mills may hesitate to invest in increased production.
Fairweather explained that adapting the market to accommodate these changes would take years, with higher costs persisting.
Who Bears the Brunt?
First-time homebuyers could face the most significant impact from the new tariffs, as they rely on new construction inventory. Meanwhile, existing homeowners with lower mortgage rates might be more insulated, but renovators will face cost increases.
Move-up buyers seeking larger homes will be affected as they stay in homes appealing to first-time buyers due to limited new construction.
Fairweather observed regional disparities in impact, with fast-growing markets in the South and West more affected due to reliance on new construction. In contrast, slower-growing metros may experience less impact.
Joel Berner added that new construction levels are notably low in the Midwest and Northeast, where demand is most acute.
Contact Newsweek editors for further information: Matthew Robinson and Cristina Diciu.