By Shaina Mishkin

Home builders got a pass on Wednesday as President Donald Trump's administration exempted lumber and some other building materials from reciprocal tariffs. It's cold comfort for the industry and its investors as the possibility of more tariff news looms.

Common materials used in home building such as lumber and copper were excluded from the reciprocal tariffs. But a senior administration official said on Wednesday that these materials will be covered in separate tariff regimes, Barron's previously reported.

A combination of direct cost increases and knock-on effects could raise the cost of building a home by more than $6,000, a team of UBS analysts wrote on Thursday.

Component manufacturers, distributors, and home builders would likely shoulder some of the increase, UBS analysts John Lovallo, Spencer Kaufman, and Matthew Johnson wrote in a Thursday note. But if all the costs fall on builders without any pricing offset, it would shrink margins by roughly 155 basis points on a $415,000 home, they added.

Tariff concerns come at a time when house hunters are already stretched by several years of inflation, both generally and in home prices, and higher mortgage rates -- though the latter is likely to fall with the 10-year Treasury yield as investors seek safety in a turbulent market. Buyer hesitancy doesn't help with demand, two large builders said on recent earnings calls.

Demand-side headwinds mean builders and manufacturers might not be able to pass higher costs from tariffs to an already-reluctant consumer, the UBS analysts noted. "Incremental price increases to the consumer could prove challenging in a choppy demand environment already constrained by meaningful affordability challenges," the analysts wrote. "As such, we think the cost will need to be absorbed by the industry."

These factors were weighing on home builders Thursday. The iShares U.S. Home Construction exchange-traded fund was down 6.6%, in morning trading and was on track for its lowest close since 2023, according to Dow Jones Market Data.

Despite the headwinds, public builders look better equipped to negotiate price increases passed to them from suppliers, the UBS analysts noted. Public home builders are "potentially advantaged in negotiations given the typical bargaining power afforded by their size and scale," they wrote.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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April 03, 2025 11:55 ET (15:55 GMT)

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