Cost and Tariff Uncertainty Weighs on Markets
NAHB Chief Economist Robert Dietz provided this economic and housing industry overview in the bi-weekly newsletter Eye On the Economy.
The uncertain timing and scale of tariffs, combined with the last legs of the fight against inflation, have rattled financial markets. Equity markets are in correction territory as investors react to a flurry of public finance proposals, including the largest proposed tariff hikes since World War II. However, improved clarity is on the way, as President Trump indicated that details concerning reciprocal tariffs will be announced on April 2.
Moreover, efforts to extend the 2017 tax cuts are well underway on Capitol Hill, and the administration has made moves to reform burdensome regulatory rules, including FHA-financing related energy code requirements and the WOTUS rule. These are positive developments for the housing outlook.
As a result of these crosswinds, bond markets are in a holding pattern. The 30-year fixed-rate mortgage remains near 6.6% and the Federal Reserve held its policy rate after its March meeting, as expected.
The policy uncertainty is having an impact on the residential construction sector. Builder confidence in the market for newly built single-family homes was 39 in March, down three points from February and the lowest level in seven months, according to the NAHB/Wells Fargo Housing Market Index (HMI). A special question for the March HMI revealed that builders estimate the recent tariff actions will have an average cost impact of $9,200 per home. Uncertainty on policy is also having a negative impact on home buyers and development decisions. However, builders have long-run faith in the market, as the component measuring sales expectations in the next six months held steady at 47.
For the overall economy, progress on inflation remains limited. Inflation slowed to a three-month low in February, with decreases for airfares and gasoline partially offsetting shelter increases. Despite the easing, the report does not capture upcoming tariff impacts. Meanwhile, housing drove nearly half of February’s inflation increase and remains higher than the 2019 pre-pandemic average of 3.4%. However, housing continues to show signs of cooling — the year-over-year change in the shelter index remained below 5% for the sixth straight month and posted its lowest annual gain since December 2021.
Progress on housing inflation is directly tied to construction costs. Prices for inputs to new residential construction — excluding capital investment, labor, and imports — were up 0.5% in February, according to the most recent Producer Price Index (PPI) report. Softwood lumber prices were 11.7% higher compared to one year ago, with tariffs threatening additional cost increases.
Such cost increases would make the current housing affordability situation worse. New NAHB analysis indicates that 100.6 million households are priced out of the market, even before accounting for further increases in home prices or interest rates. A $1,000 increase in the median price of new homes would price an additional 115,593 households out of the market.
Cost increases also affect the remodeling market, which NAHB forecasts should otherwise experience significant growth in the years ahead. In fact, new NAHB analysis finds that in 2023, nearly 6.45 million homes, around 5% of U.S housing stock, were classified as inadequate according to the American Housing Survey. Of these, 1.65 million homes were classified as severely inadequate, showing significant concerns over housing quality. While this reveals ongoing issues in nation’s housing conditions, it signals probable market growth for remodeling and home improvements in the year ahead.