Sep 245 min read

#19 Politics in Real Estate: How Trade Policies Influence Home Construction Costs

Updated: Sep 25

www.PoliticsInRealEstate.com

Trade policies—such as tariffs, trade agreements, and import restrictions—can have a significant impact on the cost of building materials and, consequently, the overall cost of home construction. As the U.S. approaches the 2024 election, different approaches to trade will influence housing markets across the country. Republicans and Democrats take distinct positions on how the U.S. should engage with foreign trade, each with varying implications for real estate and construction costs.

1. How Trade Policies Impact Building Material Costs

The price of essential construction materials—lumber, steel, concrete, and others—is highly dependent on international trade. When tariffs or trade restrictions are placed on these imports, construction costs tend to rise. On the other hand, free trade agreements can reduce material costs by promoting competition and lowering prices for builders.

Key Effects of Trade Policies on Housing:

Higher Material Costs: Tariffs on imported goods, such as steel and lumber, can raise the overall cost of construction. This can increase the price of new homes, affecting affordability, especially in markets where demand for new housing is high.
Supply Chain Challenges: Trade restrictions or tensions can lead to supply chain disruptions, causing delays in the delivery of materials and slowing construction projects. This can lead to increased costs and fewer homes being built, further tightening housing supply.

Example:

During the Trump administration, tariffs on Canadian lumber increased the cost of home construction in the U.S. Lumber prices rose significantly, making it more expensive to build single-family homes and driving up the cost of housing in some areas.

2. Republican and Democratic Approaches to Trade Policy

Republican Approach:

Republicans often support tariffs and protectionist trade policies designed to protect domestic industries from foreign competition. They argue that these measures help boost the U.S. economy by supporting American jobs and production, including in sectors like lumber and steel. However, these policies may result in higher material costs for builders and developers.

Protecting U.S. Industries: By imposing tariffs on imported materials, such as steel and aluminum, Republicans aim to shield American producers from global competition. This approach encourages domestic production, but can raise the cost of materials for builders.
Emphasis on Supply Chain Independence: Republicans argue that reducing reliance on foreign goods, particularly from countries like China, makes the U.S. more resilient to global disruptions. While this focus on self-sufficiency supports domestic manufacturing, it can also increase construction costs if imports are reduced.

Examples:

Canadian Lumber Tariffs: The U.S. has placed tariffs on Canadian softwood lumber under several Republican administrations. While these tariffs protect U.S. lumber producers, they have also led to increased costs for builders and consumers, making housing less affordable in regions that rely on this material.
Steel Tariffs: Under the Trump administration, tariffs on steel and aluminum raised the cost of these essential construction materials. While this benefited U.S. steel producers, it also increased construction costs for infrastructure and residential projects.

Democratic Approach:

Democrats generally support free trade agreements and policies that reduce tariffs, aiming to keep prices low for consumers and businesses. However, they also prioritize labor standards and environmental protections in trade deals, which can sometimes increase costs. Democrats argue that these protections promote long-term economic stability and sustainability.

Lowering Tariffs for Competitive Pricing: Democrats typically favor lower tariffs to reduce the cost of building materials, allowing developers to complete projects at lower costs. This helps increase housing affordability by lowering construction costs.
Sustainability and Labor Protections: While promoting free trade, Democrats often emphasize sustainable production and fair labor practices in trade agreements. These conditions can raise the cost of materials in some cases, but Democrats argue that the benefits of ethical production outweigh the short-term costs.

Examples:

USMCA: The United States-Mexico-Canada Agreement (USMCA), signed in 2020 with bipartisan support, continues to facilitate free trade among the three countries, ensuring that materials like Canadian lumber and Mexican steel can be imported with minimal tariffs, keeping construction costs relatively low.

3. City Examples of Trade Policy Impact on Construction

Houston, Texas:

Houston’s rapid growth relies on affordable building materials, and the steel tariffs imposed during the Trump administration raised the cost of new construction in the city. Higher material costs have been passed on to consumers, increasing housing prices.

Los Angeles, California:

In Los Angeles, rising lumber prices due to tariffs have made it more expensive to build affordable housing, an area where the city has struggled. The high demand for homes, combined with expensive materials, has contributed to the city's housing shortage.

Chicago, Illinois:

Chicago has seen rising construction costs as a result of steel tariffs, impacting large-scale residential and commercial projects. Developers have had to navigate increased costs while trying to meet demand for new housing.

Miami, Florida:

Miami’s booming real estate market has been affected by fluctuations in the price of imported materials, such as European steel. Developers have faced higher costs for luxury condominiums and high-rise buildings, with tariffs playing a role in increased project expenses.

4. Broader Implications for the Real Estate Market

Trade policies that raise the cost of building materials can significantly influence the real estate market. Tariffs tend to make home construction more expensive, limiting the supply of affordable housing. On the other hand, lower tariffs and free trade agreements can reduce costs, potentially increasing the availability of new homes and stabilizing housing prices.

Impact on Housing Prices:

Increased Tariffs: Higher tariffs on essential materials lead to rising construction costs, which are passed on to homebuyers in the form of higher housing prices. This can make it more difficult for first-time homebuyers or those seeking affordable housing.
Lower Tariffs: Reducing tariffs or eliminating trade barriers can lower material costs, allowing for more affordable construction. This can stimulate housing supply, especially in regions where demand is outpacing available inventory.

Trade Policy and the 2024 Election

As the 2024 election approaches, trade policies will play a major role in shaping the cost of home construction and housing affordability. Republicans tend to favor tariffs that protect domestic industries, but these policies can increase material costs for builders. Democrats generally push for free trade agreements that lower tariffs and reduce costs for construction. The election outcome will determine whether builders and developers face higher material costs or benefit from reduced tariffs, ultimately influencing the real estate market and home prices across the U.S.

Disclaimer:

This article is for informational purposes only and does not constitute financial or legal advice. The impact of trade policies on the housing market can vary based on location and individual circumstances. Consult with industry professionals to understand how trade policies may affect your construction projects or real estate investments.