Tariffs, Mortgage Rates, and High Housing Costs Force Builders to Adapt Strategies

The housing market, once a beacon of strength, is now grappling with a perfect storm of challenges. Tariffs on building materials, rising mortgage rates, and escalating housing costs have compelled builders to reevaluate their strategies and adapt to a rapidly changing landscape. This article explores the impact of these factors on the housing market and the innovative approaches builders are adopting to navigate these hurdles.



Tariffs on building materials, such as softwood lumber and gypsum, have significantly increased the cost of new home construction. According to the National Association of Home Builders (NAHB), the cost of lumber alone has surged by more than 170% since April 2020, largely due to tariffs and other trade policies. This dramatic increase in material costs has led to a substantial rise in the price of new homes, with the median price of a new home in the U.S. climbing by 18% between 2020 and 2021 (NAHB, 2021).

To mitigate these costs, builders have adopted various strategies:

1. Substitution of materials: Builders have started using alternative materials to replace those subject to high tariffs. For example, they may use engineered wood products instead of solid lumber or opt for different types of insulation to reduce the need for gypsum (NAHB, 2021).
2. Value engineering: Builders are reevaluating their designs and specifications to reduce the use of expensive materials. This may involve simplifying floor plans, reducing square footage, or eliminating optional features (NAHB, 2021).
3. Passing on costs to consumers: In some cases, builders have no choice but to pass on the increased costs to consumers in the form of higher home prices. According to a survey by the NAHB, 84% of builders reported that tariffs on Canadian lumber had increased the price of their homes (NAHB, 2021).
4. Lobbying for tariff exemptions: The NAHB has been actively engaged in advocating for tariff exemptions on building materials, as they believe these taxes on imported goods are driving up the cost of housing and harming affordability (NAHB, 2021).



Rising mortgage rates have further exacerbated the affordability crisis in the housing market. According to NAHB estimates, for every 1% increase in mortgage rates, the monthly mortgage payment on a median-priced new home increases by approximately $100. This increase in monthly payments, combined with rising home prices, has led to a decrease in housing affordability.

Builders have adjusted their pricing and product offerings to accommodate buyers in a higher interest rate environment. Some strategies include:

1. Offering lower-cost product lines: Builders have introduced more affordable product lines to cater to price-sensitive buyers. For example, kb home, a leading homebuilder, has expanded its KB Home National line, which offers more affordable homes with smaller square footage and fewer upgrades.
2. Price reductions and incentives: Builders have implemented price reductions and incentives to attract buyers. In 2024, 44% of homebuilders reported offering mortgage rate buy-downs, price reductions, or lower-cost product lines to offset affordability pressures.
3. Optimizing build-to-rent (BTR) and multi-family models: Builders have focused on developing BTR and multi-family projects to meet the growing demand for rental housing. These projects often offer more affordable housing options, particularly for first-time buyers and younger generations.
4. Leveraging technology and data: Builders have embraced technology and data-driven strategies to improve operational efficiency and reduce costs. For instance, Constellation HomeBuilder Systems' ERP systems help builders streamline financial tracking, vendor management, and scheduling, enabling them to pass savings on to buyers.



High housing costs, driven by factors like land scarcity and regulatory burdens, have also influenced builders' strategies in terms of land acquisition, zoning, and development processes. According to the NAHB, the cost of building materials has increased by 18% between 2020 and 2021, with lumber prices alone surging by over 300% (NAHB, 2021). These cost increases, coupled with land scarcity and regulatory hurdles, have led builders to adopt various strategies to mitigate the impact on housing affordability.

1. Land acquisition:
Builders have been exploring alternative land acquisition strategies to address land scarcity and high land prices. For instance, they have been increasingly focusing on infill development, which involves building on previously developed or underutilized land within urban areas (NAHB, 2021). This approach helps reduce the demand for new land and can lead to more efficient use of existing resources. Additionally, builders have been looking into public-private partnerships (P3s) and other innovative financing mechanisms to acquire land more cost-effectively (NAHB, 2021).
2. Zoning and regulatory burdens:
To overcome regulatory hurdles and reduce development costs, builders have been advocating for policy changes and streamlining zoning processes. For example, the NAHB has been pushing for reforms such as:
* Reducing regulatory burdens and streamlining zoning processes to decrease development costs (NAHB, 2021).
* Encouraging local governments to adopt inclusionary zoning policies, which require developers to set aside a certain percentage of new housing units for affordable housing (NAHB, 2021).
* Promoting the use of accessory dwelling units (ADUs) and other forms of accessory housing to increase the supply of affordable housing (NAHB, 2021).
3. Development processes:
Builders have been adapting their development processes to address high housing costs and regulatory burdens. Some strategies include:
* Modular and prefabricated construction: Builders have been exploring modular and prefabricated construction methods to reduce construction time, labor costs, and material waste (NAHB, 2021).
* Value engineering: Builders have been focusing on value engineering to optimize the use of materials and reduce construction costs without compromising the quality of the final product (NAHB, 2021).
* Innovative materials and technologies: Builders have been adopting new materials and technologies, such as cross-laminated timber (CLT) and advanced framing techniques, to reduce construction costs and improve energy efficiency (NAHB, 2021).

In conclusion, tariffs, mortgage rates, and high housing costs have forced builders to adapt their strategies to navigate a challenging market landscape. By exploring alternative land acquisition strategies, advocating for policy changes, and embracing innovative construction methods, builders can help mitigate the impact of these challenges on housing affordability and ensure a more sustainable future for the housing market.

References:
NAHB. (2021). Housing Affordability Index. Retrieved from