Impact of U.S.-Canada Trade War on Homebuilding

The intensifying trade conflict between the U.S. and Canada is set to affect lumber and softwood imports, creating challenges for struggling homebuilders and buyers in the U.S. Experts have voiced concerns as negotiations last week failed to halt new tariffs on $20 billion of Canadian exports to the U.S., enacted by the Trump administration. In response, Canada has retaliated with tariffs up to 50 percent on a variety of goods, starting September 8.

The latest round of tariffs impacts Canadian goods such as hockey sticks, certain clothing items, wines, some dairy products, and building materials like cement and plywood. A total of thirty-six plywood types are affected by Section 338 duties from the Trump administration. Although Canadian lumber remains unaffected by the recent 50 percent tariffs, it still carries a pre-existing 35 percent tariff.

According to Joel Berner, a senior economist at Realtor.com, the new tariff includes home furnishings and construction inputs like cabinets, plywood, and cement, somewhat mitigating the impact from recent tariff announcements. The major concern is the uncertainty surrounding future tariffs. These tariffs are already adding pressure to the U.S. construction sector, which faces rising costs and diminishing returns due to the ongoing housing affordability crisis.

The National Association of Home Builders (NAHB) warns that new tariffs will increase housing costs and slow construction, affecting both builders and homebuyers. Redfin’s chief economist, Daryl Fairweather, states that tariffs are adding thousands of dollars to home-building costs, exacerbating an already difficult situation. However, he notes that mortgage rates play a more crucial role than trade policy in housing affordability.

Impact of Tariffs on Homebuilding

The cost of building materials has surged by 40 percent since December 2020, which outpaces inflation, says the NAHB. Tariffs imposed by the Trump administration have raised prices, posing challenges for homebuilders. Roles played by tariffs, such as the 10 percent lumber tariff and 25 percent on kitchen cabinets, increase costs for builders. Additionally, Canadian softwood lumber faces a 45 percent tariff.

U.S. lumber imports are at their lowest since 2014. Based on new 338 tariffs, major impacts on homebuilding will be seen in products like plywood and engineered wood. Although Canada doesn’t dominate the market, it remains a key supplier.

Developers may reduce construction efforts due to rising costs, potentially worsening the housing shortage. Berner estimates that the U.S. faces a deficiency of over 4 million homes, and more building is needed to resolve this issue. Tariffs and uncertainty hurdles make planning difficult for builders.

Can Domestic Supplies Replace Canadian Materials?

Replacing Canadian materials quickly is unfeasible for the U.S. U.S. mills lack the capacity to compensate for a third of the country’s lumber supply quickly. Creating such capacity takes years and substantial investment. Fairweather notes it may take years for domestic supply to adjust to tariff disruptions.

Who Will Be Impacted by the New Tariffs?

First-time homebuyers, who already face reduced affordability, are likely to suffer the most from new tariffs. They rely on new construction inventory to enter the market. Existing homeowners with low mortgage rates face less impact, while renovators are more burdened by cost increases in the short term.

Move-up buyers seeking bigger, pricier homes are also affected, as they occupy homes desired by first-time buyers. Fast-growing markets in the South and West, where new constructions are prevalent, will experience the hardest impacts. Slower-growing areas with a focus on existing-home resales, like the Midwest and Northeast, will feel less impact. Nonetheless, the need for new construction in the Northeast and Midwest is emphasized due to premium prices on new homes.