Shaina Mishkin

Tariff fears hit home builder stocks on Monday morning. But ultimately, it's home buyers who could bear the brunt.

The iShares U.S. Home Construction exchange-traded fund, which tracks builders and related industries, was down about 2% in midmorning trading. D.R. Horton, Lennar, NVR, and PulteGroup, some of the largest public builders by market capitalization, were down between 2% and 3.3%.

Some of the most common home construction materials, like lumber used for framing or the drywall component gypsum, are often imported from Canada and Mexico, the National Association of Home Builders said on Monday.

"Tariffs on lumber and other building materials increase the cost of construction and discourage new development, and consumers end up paying for the tariffs in the form of higher home prices," Carl Harris, the trade group's chairman, said in a statement.

It could also get harder for homeowners and builders to get their hands on certain electrical supplies. "Similar to the supply chain crisis in 2022, I think we will see either some potential shortages and/or price hikes on certain electrical and microprocessor driven items," Wedbush analyst Jay McCanless wrote in a Monday email to Barron's.

The Trump administration on Saturday announced 25% tariffs on imports from Canada and Mexico, and 10% on imports from China, causing stocks to sell off on Monday morning. News that the administration would pause tariffs on Mexico for a month stymied the declines.

Higher construction costs from tariffs could get passed down to consumers, raising the cost of buying a home and weighing on new home sales. Higher mortgage rates and relatively firm prices has pushed buying a home out of reach for many prospective buyers.

Tariffs "are going to directly increase the cost of construction at a time when affordability, on both [the] homeownership and rental side, is already challenged," says Mike Fratantoni, the Mortgage Bankers Association's chief economist.

For two years in a row, existing-home sales measured by the National Association of Realtors sagged to the lowest yearly total since the mid-1990s. New home sales continued to gain in 2024 -- but at a cost to builders. The median new home sale price fell last year as builders offered discounts to move homes.

All else equal, a 25% tariff on lumber could drag builders' margins lower by 200 to 300 basis points, Keefe, Bruyette & Woods analysts Jade Rahmani and Ryan Tomasello wrote in a Sunday note.

They could also cause production snags. "The imposition of additional tariffs runs the risk of causing cycle time delays as builders seek alternative suppliers, and operational challenges and increased complexity as builders shift to substitute or composite materials," they wrote. "The full impact will depend on pricing power, demand resilience, and supply chain flexibility."

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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February 03, 2025 12:25 ET (17:25 GMT)

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