Trump’s Spat With Canada Is Bad News for Yet Another U.S. Industry That Supported Trump

Getting tough with Canada.

Photo by Win McNamee/Getty Images

The great thing about crony capitalism—if you’re a crony—is that once your guy is in charge, he may well enact policies that benefit you directly. That’s one of the reasons homebuilders were so giddy about the election of condo-builder Donald Trump. The National Association of Home Builders sentiment index rocketed from 59 in August 2016 to 71 in March 2017—a high note not heard since 2005, the height of the housing bubble.

Of course, homebuilders already had plenty to be happy about. Since construction fell off so sharply after the bubble burst, there is now something of a housing shortage in the U.S. New home sales rose 12 percent in 2016, to 561,000, while the median sales price of a new home rose 6.7 percent to $316,200. In March, new home sales were up 15.5 percent from the year before.

But while Trump talks a good game about being pro-business in general, many of his actions and policies are in fact bad for individual businesses. And homebuilding is no different—as became clear this week when the Trump administration said it would levy a tariff on some lumber from Canada.

One of the open secrets of home construction is that the people who do the framing, roofing, and fitting out of America’s McMansions, townhomes, and free-standing ranches are disproportionately immigrants. Many of them are undocumented. According to the Pew Research Center, in 2015 unauthorized immigrants accounted for 13 percent of the construction workforce. In Texas, where the population is booming (and homebuilding with it), it is estimated that about half the home-construction workforce is unauthorized.

Competition for labor in the housing market has been intense for some time, in part because the flow of immigrants from Latin America has decreased and in part because many people who worked in housing during the boom found other work during the bust. But with the government now openly hostile to the presence of these workers, and starting to deport some of them, it is becoming that much harder.

Labor markets are not particularly efficient. Former factory workers in Ohio won’t magically flock to Texas to build roofs just because the jobs are open and the wages are somewhat higher. And so rather than being sorted out quickly, persistent labor shortages often lead to significant wage inflation. As the Dallas Morning News notes, between 2012 and 2016, wages for Texas construction workers rose 21.2 percent, compared with 12 percent for all construction jobs in the U.S., and 2.2 percent for all jobs in the state. In Collin County, home to Plano and McKinney, construction workers make $98,000. And that was before the new administration began its immigration crackdown. The Dallas-Plano-Irving metropolitan area is short about 18,000 construction workers—about 20 percent of the total. Which means that many homebuilders literally can’t find people to do the job, and the rest must attempt to pass on higher costs to their customers.

Aside from labor, materials like cement, drywall, and wood are major cost items for homebuilders. And on Monday, as Commerce Secretary Wilbur Ross dolefully announced the tariffs of 20 percent on Canadian soft lumber, homebuilders were hit with another price increase. Ross noted that the tariff would lead to a “small increase” that would be nowhere near 20 percent. The National Association of Home Builders said that Canadian wood prices could rise 6.4 percent as a result, thus boosting the price of the typical new home by $1,236.

But markets in materials are somewhat more efficient than labor markets, and so they will adjust quickly to meet the higher price. As CNBC’s Diana Olick noted, “just the anticipation of it [the higher tariff] has pushed lumber prices higher by about 22 percent since the start of this year.”

Homebuilders are already facing significant challenges. They have been protecting their profit margins by passing on higher labor, land, and material costs onto homebuyers in the form of higher home prices. But that means first-time buyers, many of whom don’t have much in savings, have to come up with higher down payments. And if new home prices rise by a significantly higher rate than incomes do, it shuts out a lot of first-time buyers from the market. Meanwhile, mortgage rates are rising, which only exacerbates the challenges facing buyers.

Homebuilders’ sentiment fell in April from its high in March. If the government takes unilateral action to increase their costs more—a tax on sod? a government mandate to increase realtors’ commissions? a tariff on imported marble?—it wil become just the latest industry to feel disenchanted with our businessman-in-chief.