Proposed tariffs could raise construction costs and slow homebuilding
The affordability crisis in the US housing market may be about to get worse.
New tariffs proposed by the Trump administration could drive up the cost of essential building materials, making it even harder for developers to construct homes at affordable price points.
For years, builders have struggled to keep construction costs under control while meeting the demand for housing. But with the cost of Canadian lumber up 14.5%, concrete prices rising 8%, and household appliances expected to increase by as much as 20%, developers now face an even tougher challenge.
A recent analysis by CoreLogic warned that if the proposed tariffs on Canada, Mexico, and China go into effect, home construction costs could rise by 4% to 6% over the next year. These increases would be on top of the usual annual inflation in building materials, potentially pushing costs up by as much as 10% in the short term.
The impact could be significant. The average cost of building a new home in 2024 was $422,000. If construction costs rise as projected, that could add between $17,000 and $22,000 to the final price of a home. That price jump would make it even more difficult for many Americans to afford homeownership at a time when affordability is already at a breaking point.
Builders face difficult choices
The rising cost of construction materials is forcing builders to rethink their strategies. Some, like D.R. Horton, have attempted to shrink home sizes and offer incentives like mortgage rate buydowns to offset affordability concerns. But even those adjustments have not been enough to keep prices stable.
The company reported that the average closing price of its homes rose 1% to $382,200 last year, despite efforts to keep prices down. At the same time, homebuilding revenues declined by 2%, indicating that affordability concerns are already affecting demand.
Profit margins for builders have also taken a hit. According to the National Association of Home Builders, the average homebuilder profit margin in 2024 was 11%. Even a 4% increase in material costs from tariffs could significantly cut into those margins, making it even harder for developers to justify building entry-level homes.
“The economics are now upside down. Even incremental increases in the cost of materials, labor, and equipment make it that much more difficult to build a home profitably,” said Pete Carroll, CoreLogic’s executive vice president of public policy and industry relations. “If we’re going to create and restore homeownership opportunities for families, we need to fill in this single-family starter home segment that’s missing.”
With shrinking profitability in the new home market, builders may choose to slow construction or shift focus to higher-end properties, further constraining supply and driving up prices for existing homes.
Supply chain squeeze
Some industry experts believe that while Trump’s administration is aiming to boost domestic production of building materials, the shift may not lead to lower costs.
Relying more heavily on US-produced materials could overwhelm domestic supply chains, leading to short-term price spikes, according to Jay Thies, CoreLogic’s vice president of pricing analysis and delivery.
He pointed to the 54% surge in lumber prices during the pandemic, when demand exceeded supply, as an example of what could happen if builders scramble to secure domestic materials.
Lumber is particularly vulnerable to price fluctuations. While US sawmills have ramped up production, they have not fully replaced Canadian imports, leading to an 8% year-over-year decline in lumber sales volumes.
The concrete and cement industry faces similar concerns. Canada and Mexico currently supply 25% of the US cement market, and if tariffs are imposed, the added costs could be passed down to builders. Major domestic suppliers, like James Hardie, have already increased prices due to rising production costs, and further disruptions could drive prices even higher.
The construction industry is already struggling to keep up with demand, and a surge in rebuilding efforts due to natural disasters could add even more strain.
In January, wildfires devastated parts of Los Angeles, damaging 20,000 properties, with 60% expected to be total losses, according to CoreLogic. The rebuilding process will require a massive supply of materials, and if tariffs push prices up at the same time, costs for reconstruction could spike significantly.
A similar scenario played out after the Maui wildfires in 2023, when concrete prices jumped 7% within a month as demand surged. If tariffs limit the availability of imported materials, post-disaster reconstruction efforts could further tighten supply chains and push prices higher for both new home construction and repairs.
“Reconstruction and new development will be initially affected unequally. Reconstruction demand in the wake of the Los Angeles fires is likely to increase prices temporarily, but we are watching longer-term trends to determine how the supply chain will absorb tariffed inventory,” said Thies.
Impact on homebuyers
For buyers already struggling with affordability, higher home prices caused by tariffs could make homeownership even more difficult.
The median home price in the US hit $385,000 in October 2024, a significant increase from the previous year. The Department of Housing and Urban Development defines cost burden as spending more than 30% of gross income on housing-related expenses. With the median annual wage in 2023 at $48,060, many Americans were already on the edge of affordability.
Read next: Will the Fed's approach to interest rates change under Trump?
If home prices continue to rise due to higher material costs, constrained supply, and increased competition for existing homes, more potential buyers will be pushed into the cost-burdened category.
“Without appealing margins to encourage affordable new construction and ease supply pressures, homebuyer demand will continue to push up the cost of existing houses—and the result will be residential gridlock,” CoreLogic’s report warned.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
