A tariff is simply a tax imposed on imported goods. When products like building materials enter U.S. ports, paying the applicable tariff is a standard part of the customs process.
Tariffs have deep roots in American history. From the colonial era through the early 1900s, they served as the federal government’s primary revenue source. They were relatively straightforward to enforce even before modern technology, as customs officers could inspect incoming shipments at ports and collect the appropriate fees. The federal government’s limited taxing authority under the Constitution meant that a modern income tax was not legally permissible until the 16th Amendment was enacted in 1913.
Despite their historical importance, tariffs have several inherent problems that led to their declining use over the past century:
When the global economy faltered in 1930, many nations, including the U.S., implemented protective tariffs with the Smoot-Hawley Act. Most economists view this wave of protectionism as a contributing factor to the severity of the Great Depression. Learning from this experience, the U.S. and other advanced economies gradually reduced trade barriers during the postwar period to foster economic cooperation and peace.
Even during periods of free trade enthusiasm, tariffs never disappeared entirely. They remained relatively low in recent years, dropping to 1.5% in 2017 after decades of bipartisan efforts to establish global trade agreements. The Trump administration increased rates to approximately 3% during his previous term, which President Biden largely maintained.
According to the Yale Budget Lab, the Trump administration’s announced policies would raise the average tariff to 22.5% — higher than during the Smoot-Hawley era and roughly equivalent to 1909 levels.
The scale of newly announced tariffs is significantly larger than previous ones. They affect nearly all goods from every country worldwide and invoke emergency authority not previously used for this purpose.
Tariffs increase construction costs through several key mechanisms:
The specific impact depends on several factors:
The recent tariffs on imports from China (20%), Mexico, and Canada (25%) have significant implications for construction. According to the National Association of Home Builders, these tariffs could increase builder costs by approximately $7,500 to $10,000 per home for residential construction.
This impact is substantial because approximately 7% of all goods used in new residential construction are imported. Critical materials like softwood lumber come predominantly from Canada (72% of imports), while gypsum for drywall is mainly sourced from Mexico (74% of imports).
For multifamily construction specifically, with 46% of materials sourced from these countries and 35-50% of project costs tied to finished materials, tariffs could increase material costs by 7.5%, potentially raising total construction budgets by 3-4%.
Beyond core construction materials, reciprocal tariffs may also influence other building-related imports, such as carpeting, electrical outlets, security equipment, furniture, and tools. Projects that have already been awarded but are not yet started are likely to experience the most significant impact.
Industry forecasts suggest the construction industry will feel the brunt of tariff policy changes in late 2025 and early 2026. Meanwhile, due to tariff-related inflation concerns, the Federal Reserve is expected to maintain stable interest rates through most of 2025.
Homebuilders have been relieved, as Canada and Mexico were exempted from the latest round of tariffs, protecting key lumber and drywall component imports. Additionally, a carveout exists for lumber and copper imports.
These tariff developments are challenging the U.S. housing market, which is already struggling with supply constraints and affordability issues.
Developers with affordable multifamily housing projects in the pipeline or underway but for which materials have not yet been purchased should prepare for these possible increases. Developers facing this uncertainty should take a proactive, strategic approach. Here are some of the steps they should consider:
1. Lock in Pricing Where Possible
2. Revisit and Update Budgets
3. Communicate with Key Stakeholders
4. Evaluate Alternative Materials and Suppliers
5. Monitor Policy and Industry Updates
6. Build Schedule Flexibility
7. Document Impacts
Being proactive can help developers manage risk rather than be blindsided by rising costs. In this environment, a smart developer remains nimble, communicates clearly, and plans for the worst while hoping for the best.
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