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Tariffs Threaten to Derail U.S. Housing

Wednesday, October 3, 2018

By Pat Neal, Neal Communities

However well intentioned, new tariffs and import taxes have created a terrible ripple effect in the economy, often hurting the working-class backbone of a community the most. As affordable homes are becoming more and more scarce throughout the nation, these new financial burdens threaten the housing market in the United States.

Tariffs on imported goods are, ostensibly, aimed at preserving American industries and American jobs. But the new tariffs enacted in 2017, especially on Canadian building products, are already causing unfortunate upheaval in the crucial Florida market where my company operates. And at this very moment, tariffs on $200 billion of Chinese imports – which may more than double on Jan. 1, 2019 – threaten to do significant damage to Florida’s housing industry.

At Neal Communities, we understand the potential impacts of outside influences, and we study them carefully in order to prepare. We do so because we are fiscally minded, prudent, and experienced. We have survived worse and we will certainly survive this. Nevertheless, the effects of the current trade situations matter to all of us – our community, our state, and our country. Those of us in the homebuilding industry have built our companies around serving our communities and honing our best practices.

While Florida’s luxury homes draw a lot of attention, the state’s housing market has long been tasked with creating options for small families and young professionals who are vital to the economy. Even today, demand for entry-level homes – those that cost less than $250,000 – continues to dominate Florida’s housing market.

In 2008, we introduced our cottage series floorplans, 1,200 - 1,600 sq. ft. homes with two to three bedrooms, two bathrooms, a kitchen, living room, and attached garage. Starting price: $122,900, an appealing and affordable option for first-time homebuyers and empty-nester retirees alike.

The cottages were so popular that the series was added into several Neal neighborhoods from Parrish to Venice. To date, approximately 700 cottages have been sold. While the design maintained affordability, these cottages were still constructed to meet our company’s longstanding principles for quality materials and workmanship. They were built with Canadian lumber, the gold standard, so that they would maintain their shape, even in Florida’s humid environment. Our cottages are built to last.

Unfortunately, Canadian lumber and steel have both been subject to heavy taxation under new laws. In April 2017, a timber tariff was imposed on Canadian softwood lumber and additional “anti-dumping” duties were added two months later. In June 2018, imports of steel and aluminum saw new tariffs, causing Canadian prices to skyrocket.

In July of this year, new tariffs of 10% were levied against $200 billion of imports from China, including $10 billion of goods used by the homebuilding industry. That represents a $1 billion tax increase on residential construction.

For an example of how these costs pile up, consider just one aspect of the homebuilding process: pipes and pipe fittings. With these new laws, price increases for ductile iron pipe and fittings are estimated to cost an additional $600 per house. Our team conservatively estimates that increases in steel, aluminum, and lumber could bring thousands of dollars in additional production costs per home.

Passing these costs on to the consumer means increasing the purchase price and shrinking the market. Our target customers were either unwilling or unable to buy a cottage over $300,000. Everyone knows that it is hard for a working-class person in our state and region to have a home with a mortgage payment they can afford. But recent tariffs prevent us from continuing to provide an affordable housing solution. The people being hurt are right here in southwest Florida.

As a result of rising costs, we’re no longer planning to build more cottages in new communities at this time. The last one was sold in September 2018 to a marketing professional, priced in the mid $200,000s. Homeownership prospects for Florida families and young professionals remain dire.

Of course, we are not giving up. Though the cottage designs ultimately proved unviable in the current tariff environment, our team is working on designs and plans that may be able to circumvent the rise in production costs while also providing affordable housing solutions.

Still, even more obstacles loom in the immediate future. If U.S. and China trade conflicts aren’t resolved by the end of the year, current proposals advocate increasing the already significant taxes on Chinese imports. Come January 1, the current $1 billion tax on residential construction could jump to $2.5 billion, as new tariffs would target an additional $267 billion of imports.

The National Association of Homebuilders (NAHB) is on the record as strongly opposed to these tariffs as well. NAHB chairman Randy Noel has said that the new tariffs on Chinese imports “could have major ramifications for the housing industry,” especially after the lumber tariffs have already added thousands of dollars to the price of a typical single-family home.

“With America facing a housing affordability crisis, it is counterproductive to enact policies that will needlessly drive up the cost of housing,” says Noel. We are trying to prevent an affordable housing crisis in this state. Once a crisis occurs, as is currently happening in California, it is that much harder for the economy to recover. The workforce that fuels our companies won’t be able to afford to live here.

In light of the U.S. and Canada’s deal to salvage NAFTA this week, one positive proposal would be to expand trade discussions in order to lessen the effects of the current lumber taxes. On the other hand, the lingering threat of exponential increases in tariffs on Chinese imports represents a serious and significant move in the wrong direction.

The stated goal of these tariffs – to save jobs in Pennsylvania iron and steel foundries – is admirable, however the tariffs have already triggered unfortunate, if unintended, consequences for businesses and consumers in Florida and other parts of the country. Florida homebuilders can’t serve their communities the way they want. Florida families can’t afford homes.

These tariffs are hurting Americans, and more tariffs will only further the damage. We need to find a better way.

About the Author

Pat Neal is CEO and chairman of the board of Lakewood Ranch, Florida-based Neal Communities, No. 46 on this year's Builder 100 list of the top U.S. builders by closing.

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