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The Impact of New Steel Tariff on the New Construction Housing Market

Written by Star Report | Mar 20, 2018 10:41:23 PM

By Oren Jacobson, Market Analyst - New Home Star //

I’ve recently been asked whether or not the new proposed tariffs on steel will have any impact on housing. The short answer is that it depends on how much steel is being used in construction. In its very nature, a tariff increases costs for the material in question so depending on what extent that builder’s need that material for constructing their homes is where they will see the largest price increase. Regardless of where the material is sourced, the price of the commodity will rise across the board just as it did when the administration placed a tariff on lumber last year.

Yet, the longer answer to this much-discussed question is far more complex and has too many variables for us to provide an absolute answer. Variables surrounding whether or not other countries will place any tariffs as a response, what level (if any) that escalates in a tit for tat effort, the role the materials may play in the cost of everyday consumer goods, and what the impact is on inflation and interest rates.

The question for us to consider is the risk associated with the tariffs. Those risks are far more about the macroeconomic environment than they are about the specific impact on the micro (steel cost increases) level to the industry. Developers are keeping finished available lot levels down (as you would expect given their incentives and lessons learned) since builders don’t want to remain on land for lengthy amounts. This has created an artificial bottleneck in the industry, which has, in turn, created an artificial supply shortage which has caused lot prices to rise. At the same time, we’re experiencing labor shortages which are causing labor costs to rise. This combination has led to a scenario where median new home prices are far above the pre-recession peak in spite of the fact that overall homeownership levels are as low as they’ve been in 40 years. As such, new construction housing price premiums keep rising and that keeps shrinking the pool of available demand and a steel tariff could add to that challenge.

Why does that matter to housing? The Federal Reserve System (FED) has a dual mandate to maximize employment and control inflation. We are at 4% unemployment even before either policy rolls out so there won’t be much slack in the economy, only adding to the raising odds of inflation. If the FED sees inflation coming, they will have no choice but to raise interest rates to combat this effect. While FED funding rates are not directly tied to mortgage rates, they are in fact connected. An industry that is already experiencing a series of upward pressures on cost does not need to also experience shifts that diminish affordability and shrink the pool of potential buyers further (thus decreasing demand) which is what rising mortgage rates would result in over time. Decreasing affordability among a population that is incurring more debt again and thus reducing demand.

Look, there are a lot of “if, then” statements built into this. Economists are like weather people; they do a great job of telling you what happened, but they aren’t as good at predicting when it will happen. Just like the weather, future events and people are simply unpredictable and do not travel in straight lines the way an economic or weather model does. It is also conceivable that economic shocks could push people into the bond market driving rates back down, though usually as demand increases, money shifts away from bonds which means rates have to rise to make them more attractive to investors so that the overall money supply (and thus inflation) is contained.

All in all, we should continue to see market strength in 2018 but there are some reasons for concern in the mid-term. That doesn’t mean anything bad will happen because of this, it just means we have to watch the data as it comes in and evaluate as we go. It’s worth noting that there are macro factors that could also be challenging when analyzing the effects the tariff will have on the housing industry.

So what is my advice given all of this? Successful builders will invest heavily into developing their front-line teams right now so they can thrive no matter what happens in the market. Proactively preparing is the way to go and now is the time to do so!