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

The trade conflict between the U.S. and Canada is intensifying, affecting imports of lumber and softwood. This situation is anticipated to further challenge American homebuilders and buyers.

Imposition of New Tariffs

Recent discussions between the two nations failed to prevent new tariffs on $20 billion of Canadian exports to the U.S. These were introduced by the Trump administration. In response, Canada will impose tariffs up to 50% on various goods starting September 8.

Among the targeted Canadian products are hockey sticks, certain clothing, wines, some dairy items, and building materials such as cement and plywood. The new tariffs impact 36 types of plywood under Section 338.

While Canadian lumber currently has a 35% tariff from existing levies, it is not subject to the newly announced tariffs.

Effect on U.S. Construction Sector

New tariffs on home furnishings and construction materials, including plywood, are expected. Joel Berner, a senior economist at Realtor.com, highlights that the uncertainty surrounding future tariffs is the significant concern.

The U.S. construction industry faces escalating costs and reduced demand for housing, exacerbating the ongoing affordability crisis. The National Association of Home Builders (NAHB) cautions that the tariffs will raise housing costs and slow construction, negatively impacting both builders and buyers.

Redfin’s chief economist Daryl Fairweather noted that while mortgage rates play a more crucial role than trade policy, current tariffs are worsening the situation.

Rising Material Costs

The NAHB reports a 40% increase in building material costs since December 2020, surpassing inflation rates. Tariffs from the prior year have already pushed prices higher. Further increases will aggravate issues faced by homebuilders.

Building materials, excluding energy, saw a 5.0% year-over-year price rise in July, marking the largest increase since December 2022. The U.S. imports significant amounts of aluminum and steel from Canada, which remain subject to a 50% tariff from Section 232.

Additionally, tariffs on imported lumber and kitchen cabinets continue to raise builder costs. Since November, Canadian softwood lumber faces a 45% tariff crossing the U.S. border.

Reduced Lumber Imports

U.S. lumber imports are at their lowest since 2014 based on quantity. NAHB indicates the direct impact of Section 338 tariffs will be seen in plywood, veneer, and engineered wood products.

Although Canada is not a major share of imports, it remains a crucial supplier of certain building materials.

Challenges of Domestic Supply Replacement

Experts caution against quick substitution of Canadian materials with domestic supplies. U.S. mills lack the capacity to replace a third of the nation’s lumber supply overnight. Such capacity requires years and capital to develop, which is unlikely if tariffs might soon lift.

Fairweather suggests that domestic supply could take years to catch up, if ever. Markets adapt slowly, and higher costs are expected in the near term.

Impact on Homebuyers

First-time homebuyers are projected to face the most significant challenges due to the tariff increases. They rely on new construction for opportunities to enter the market.

Existing homeowners with low mortgage rates are more protected from tariff effects. However, renovators will bear most short-term cost increases.

“Move-up buyers” looking for larger, more expensive properties will also be affected since they would typically vacate homes suited for first-time buyers.

Geographical Differences

Tariff impacts will vary across regions. Fast-growing Southern and Western markets, where new construction is prevalent, will experience the harshest effects. Conversely, slower-growing areas relying on home resales will see less impact.

Berner indicates the Northeast and Midwest, where construction demand is highest, will feel substantial impacts. The price premium for new homes signals the need for increased building activity in these regions.