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According to the National Association of Home Builders (NAHB) as much as $10 billion in goods imported from China are used in homebuilding. Clearly boosting the cost of those goods by 25 percent would impact profit equation in homebuilding.
This is not good news for homebuilders -- or buyers. The housing market is already in a vicious cycle: Low supply is driving up prices, and higher prices are freezing out buyers.
Even though new construction is picking up, the overall pace is slowing. And this is even harder to reconcile with recent data from the National Association of Home Builders’ showing that the monthly index of homebuilder sentiment jumped to a seven-month high in May.
What else is driving up prices?
The cost of the principal materials (land, labor and lumber) used to build a home is rising. The prices of these key inputs are all on the rise for differing reasons. And the current U.S.-China trade tensions may make things worse.
Land and labor
At first blush, one might think that the rising prices of homes would offset the increase in input costs, however, that has not been the case. The tight labor market and restrictive local permitting processes have escalated the cost of labor and land more rapidly than can be absorbed by higher home prices.
Lumber and tariffs
You may recall lumber costs rose a year ago as a result of trade considerations with Canada. Similarly, tariffs on imported steel and aluminum (not used as extensively as lumber) have increased the cost to build a home.
The escalating tariffs (beginning in June) as well as the threat of a 25 percent tariff on the balance of $325 billion in goods imported from China could have a noticeable impact on the cost to build a home. Many of the mundane materials used in home construction from nails to screws to hinges are manufactured in China; as are the more obvious materials, such as doors, windows, appliances and fixtures.
The bottom line
Unfortunately, the limited supply of properties to choose from may be the case for a while. And homebuilders aren’t likely to alleviate the supply shortage if import tariffs are imposed.
Mitch Roschelle is a partner and business development leader at PwC. He has over three decades of experience advising clients worldwide. He’s a frequent commentator on FBN and FNC on business trends, market behavior, housing, the economy and policy matters in the public and private sectors.