Homebuilders Shiver as Tariffs Bite in February

As the winter chill sets in, homebuilders are feeling the cold bite of tariffs, with sentiment plunging to a five-month low in February. The National Association of Home Builders' (NAHB) Housing Market Index (HMI) dropped a sharp 5 points from January to a reading of 42, with anything below 50 indicating negative sentiment. Last February, the index stood at 48.

Builders are grappling with elevated mortgage rates, high home prices, and uncertainty over tariffs, which threaten to raise construction costs significantly. President Donald Trump's tariffs on Canada, Mexico, and China, announced in early February, have cast a shadow over the housing market, with builders expecting higher costs for materials like lumber, appliances, and steel.



Of the HMI's three components, current sales conditions fell 4 points to 46, buyer traffic dropped 3 points to 29, and sales expectations in the next six months plummeted 13 points to 46, hitting its lowest level since December 2023. NAHB Chairman Carl Harris noted that while builders hold out hope for pro-development policies, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI.

NAHB Chief Economist Robert Dietz warned that uncertainty over the scale and scope of tariffs has builders further concerned about costs. "With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs," said Dietz. "Addressing the elevated pace of shelter inflation requires bending the housing cost curve to enable adding more attainable housing."



Homebuilder sentiment had been gaining steadily since August on expectations of lower mortgage rates and potential pro-development policies. However, the drop in sentiment, coming right before the all-important spring market, signals potentially less supply in the market. Several homebuilders have noted the pullback in buyer demand in recent earnings reports.

To attract buyers in a higher-rate environment, homebuilders might consider offering more affordable home sizes, improving construction efficiency, providing flexible financing options, and incentivizing buyers with closing cost assistance or upgrades. By employing these strategies, builders can adapt to the current market conditions and maintain demand in the face of affordability pressures.

As the tariff situation continues to unfold, homebuilders must remain vigilant and adjust their strategies accordingly to remain competitive and responsive to buyers' needs. The impact of tariffs on the housing market can be mitigated if they are removed or reduced, but builders must be prepared to navigate the uncertainty and adapt to changing market conditions.