(Sacramento News & Review)—There is already a crisis of available and affordable housing in America. But now, political uncertainty and economic volatility could make home buying even less attainable.
For the last two decades, higher housing prices have overrun workers’ wage increases that might have helped offset rising prices of American homes, according to the U.S. Department of the Treasury. The median price for a home is now $459,000. But 76 million households cannot even afford a $300,000 home, according to the National Association of Home Builders (NAHB). That represents 57% of Americans. In California, the median price for a home is $856,830, and only 17% of households can afford that amount, according to the group Californians for Homeownership.
Now, the proposed Trump tariffs on building materials are creating financial volatility that could send housing prices up significantly. Since his announcement of widespread tariffs on April 2, the additional costs imposed on imported lumber, gypsum, aluminum, electronics and other related materials delayed the nation’s housing starts in April, according to NAHB.
“The decline in single-family housing starts in April mirrors builder sentiment, as elevated interest rates, uncertainty on the tariff front and rising construction costs are exacerbating housing affordability challenges,” said Buddy Hughes, a homebuilder who chairs the NAHB, in a press release.
The proposed tariffs caused such a shock to the stock market that on April 9, Trump put a 90-day hold on many of them. Nevertheless, this uncertainty is causing homebuilders, manufacturers and potential buyers to delay or rethink their future plans.
“More tariffs equal more anxiety and uncertainty for American businesses and consumers,” said David French, executive vice president at the National Retail Federation, in a public statement. “Tariffs are a tax paid by the U.S. importer that will be passed along to the end consumer. Tariffs will not be paid by foreign countries or suppliers.”
Canadian lumber, Mexican gypsum and materials from China
One of the largest material costs for housing construction is lumber, and the largest amounts of the needed spruce, pine and fir varieties are imported into the U.S. from Canada.
Finished “ready to assemble” lumber is tariff-free due to 2018’s United States Mexico Canada Agreement (USMCA). But that only amounts to 15% of all imported Canadian lumber. The remaining 85% is unfinished, or “raw” lumber, which is currently taxed at 14.5%.
Now, the Trump administration seeks to add an additional 25%, bringing the total tariff on Canadian lumber to 39.5%, while the NAHB and other homebuilders have lobbied unsuccessfully for a permanent exemption.
“The lumber tariffs certainly don’t help,” said John Vignocchi, managing partner of Urban Capital LLC, a Sacramento real estate development company with experience working on “missing middle” housing, including urban infill projects for workforce housing.
Vignocchi said that “no tariffs are helpful in the short run” because they quickly drive up costs. “We were bracing for supply chain shocks from the tariffs. I currently have two projects under construction for 173 units,” he said. “However, I haven’t seen any issues [yet] that are dramatic.”
Another major cost comes from gypsum used to make sheet rock. Over 70% of gypsum is imported from Mexico and the Trump administration proposed a 25% tariff on all Mexican materials.
Likewise, the U.S. imports many building materials from China, including electrical fixtures, plumbing fixtures, ceramic tiles, stone, aluminum and some finished lumber. Trump tariffs on products from China are being enforced at different rates. They range from 10% at their lowest and 145% at their highest. As of June 1, the average tariffs on products from China was 30%.
Adding even more to the uncertainty, a three-judge panel at the U.S. Court of International Trade in New York City ruled on May 28 that Trump overstepped his authority to impose any tariffs. The new ruling came from a lawsuit filed by a legal advocacy group Liberty Justice Center. While that ruling put a pause on all new tariffs, the Trump administration went straight to an appeals court the next day and won a temporary stay of the May 28 stop-order.
On May 30, Trump doubled his proposed tariff on steel and aluminum coming in from any country, from 25% to 50%, another move that will raise home prices.
As of press time on June 5, the 50% metal tariffs are active, due to the appeals court stay on the original three-judge order. But these developments are constantly changing.
How interest rate volatility raises prices
But whatever tariff amounts are agreed upon, investors who buy America’s debt may put their money elsewhere if they think the current volatility will negatively affect US bonds.
U.S. bond yields can rise during a “sell-off” when the federal government cannot find enough buyers willing to take on added U.S. debt. Because mortgage rates tend to follow bond yield rates, a sell-off in bonds can also keep mortgage rates high. The vacillation of Trump’s tariff policy created just such a sell-off in April, as investors worried about the government’s ability to pay its long-term debts.
“After Trump’s tariff April 2 announcement, the bond market (alongside the stock market) experienced a sell-off, an unusual move that shows how deeply uncertain investors are,” according to a story in CNET, a media outlet that covers technology news and analysis, and consumer trends.
Trump has also proposed taking Freddie Mac and Fannie Mae, the government’s two largest mortgage lenders, out of government conservatorship and make them publicly owned companies with shareholders. The two lenders were protected from financial devastation during the economic crisis of 2008 by a $187 billion infusion of government guarantees.
While Trump said the federal government would still back Freddie Mac and Fannie Mae loans, Congress is tasked with making that final determination. The added uncertainty about who makes monetary policy hinders the ability of material suppliers and home builders to plan for the future.
The future of housing prices
The proposed tariffs are not the sole reason for higher prices. Monopolies within the housing market also play a role.
Large corporate trusts and hedge funds known as “property investors” regularly purchase hundreds of thousands of homes across the country. Investors like the Blackstone Group, American Homes 4 Rent, Invitation Homes and Progress Residential can secure special interest rates as low at 2% which individual buyers can’t match.
It allows these corporate investors to outbid individual buyers, hoping to turn them into permanent renters while pushing up home prices due to the nationwide lack of supply.
In addition to buying newly developed homes in bulk, corporate buyers continuously solicit individual homeowners in cities where rental rates would best tolerate an increase.
“I would get calls from Washington state and Arizona area codes … offering to buy as-is and pay cash,” said Sacramento homeowner Daniel Bernick. After more than a year of frequent cold calls, Bernick blocked the phone numbers. When he finally did put his Arden Arcade home on the market in early May, he instructed his realtor to not accept offers from institutional buyers.
“It seemed like the right thing to do,” said Bernick, who accepted an offer from a single mom and her daughter.
Local housing consultant Diane Luther says increases will also come from: “general inflation, insurance costs, labor shortages, state funding drying up and Trump’s proposed cuts to Housing and Urban Development.”
Some home builders and homebuyers may decide to pay now and worry later under the assumption that today’s high prices will become tomorrow’s bargains. Others may try to wait out the uncertainty to see if prices or mortgage rates ease down. But either way, fear of the unknown is the motivating factor underlying these big decisions.
Author: Kevin Magri