S7, Bonus: Navigating the Tariff Tangle

SEASON SEVEN, BONUS EPISODE | TRANSCRIPT

KIM
Hi, everyone. This is Kim Hibbs with The Art of Custom alongside Melody MEiners, our trusty sidekick here.

We wanted to bring you a special update because there's a lot of talk going on about tariffs in the construction industry.

There's a lot of talk about construction costs as we head on into 2025. From what I'm understanding, Melody, just in reading some of the articles written by the national media, homeowners are confused. They don't know what to expect with tariffs. They don't know where they're going. They don't know how it's going to affect construction costs. So I thought we would spend just a couple of minutes trying to give everybody a little bit of a better understanding of where that stands.

MELODY
And this may also be a little bit for my benefit. So I stopped running into your office asking, what's going on, Kimberly?

KIM
So here's what I can tell you. A couple of different things going on is we really haven't started to feel the effects of tariffs just yet.

Now, just as I say that, there's absolutely been some vendors who are being a little bit, in my opinion, too proactive with implementing tariff pricing. Tariffs, as far as the construction industry, typically lag several months. So for those who are already implementing tariffs, it's more of a reactionary than I think they should be. So we're seeing some of that, but we just aren't seeing major price increases as of now that are related to tariffs.

Part of it is also due to the fact that every time you turn on the nightly news or open up your tablet and start reading an article, you know, tariffs are either on or they're off or they're changing or they're evolving. So there's nothing that's set in stone. So my major point to everybody is, as of right now, tariffs do not have a major impact in the residential construction industry.

MELODY
So wood from Canada.

KIM
Okay, perfect place to start. So softwood, which goes into the construction of most all the homes here in the United States, 85% of that softwood lumber comes from Canada. We've already had a 15% tariff in place from Canada for many years. That hasn't changed. If you remember, they were exempt from some of the tariffs that were supposed to take effect several weeks ago, but they're now exempt.

Now, there is talk that those tariffs could double as we head toward fall or head toward, you know, the latter part of this year. But as of right now, softwood lumber prices from Canada have not been affected by the tariffs, and they won't be affected by the tariff for at least several months.

MELODY
So we have two components of building a home. You have the sticks and bricks, and then you have the selections and appliances and things like that on the inside.

So what are we talking about with the two of those? Is it sticks and bricks that are going to stay the same? Do you think that there's going to be any sourcing issues with those finishes and things like that?

KIM
Yeah, I heard an interesting interview with the CEO, actually, of Pulte Homes. His name is Ryan Marshall. I was able to catch an interview that he had recently and actually read an article in Builder Magazine as well.

Interesting points. Again, right now, there is no sourcing issues, As we get further along and see if tariffs are going to be implemented or not, we may see some more of this toward the third and fourth quarter of this year.

I mean, Pulte Group is one of the larger builders in the country, but I'm also hearing from other builders through the National Association of homebuilders, that where they expect pricing to go is Pulte is projecting 1% of your total build cost. If you're building a $500,000 home, that's $5,000 increase due to tariffs. Million dollar home, $10,000 in tariff price increases.

Now, the National Association of Homebuilders has done their own study where they say the average home, which is I think the average price of a home right now is somewhere in that $400,000 price point. They say the prices are going to go up $9,200 on the average home.

Now, that's a little bit more than Pulte is estimating. But if you think about it in the terms of, okay, we're starting to see some hard numbers by some very reputable and reliable sources come out. If you think about it, Melody, that's not a lot of a price increase due to tariffs because only 7%, roughly 7% of the materials used to build a new home face possible tariffs.

So I think a lot of the concern is being somewhat blown out of proportion. You know, I'm not going to discount it because a dollar is a dollar and I'm not going to say that, you know, right, raising the price of a home $10,000 is not a lot of money because it is.

My point being, though, I don't think it's as big of a problem as a lot of people are indicating. And think about it, if people are trying to wait out tariffs, what's going to happen is you're going to have year-over-year price increases anyway of 3% to 5% virtually across the board.

So if you're trying to wait out tariffs versus price increases, you're going to get hurt much more by trying to wait out the price increases, which is 3% to 5% of what it would cost to build a home versus what Pulte is predicting, which is 1%.

So from that standpoint, You know, just wanted to kind of pass on that information, food for thought for people. And that's why I wanted to do this, you know, quick cut-in special episode.

MELODY
Is there anything proactive that a client can do?

KIM
What we're having some of our clients do is, for some of the, like, metals and aluminums, you know, the appliances, fireboxes, steel that go into the construction process, we're trying to get out ahead of it if we feel we need to by having some of our clients who are either close to beginning construction or are now under construction, we're having them, for example, place some of their orders for things like their firebox, for things like their appliances. And even if they have to pay a little bit of a storage fee here or there, it will help because then they won't be faced with the tariffs themselves.

So this is where it comes down to get with your building team, get with your design team, and start asking those questions of your vendors. We did that with a couple of Park City builds, and we have clients working directly with our appliance vendors.

Some are placing orders early. Others are like, I don't see a need to right now because I think that, you know, the tariffs are being blown out of proportion a little bit, and they believe that there will be some sort of settling in place by the time that they need to place their orders. So we try to leave it up to the client, let them make the decision, but we want to help them giving them the information so they can make an educated decision.

MELODY
So some of this non-industry facing news maybe take with a grain of salt?

KIM
That is a great way to put it, Melody. I think when you hear about the auto industry and when you hear about some of the produce and things like that, it's so different than the home building industry.

I go back to what the experts are telling me. And the experts are telling me that we might see some effect by tariffs later on this year. You know, the price increases are going to be modest based upon the actual cost to build a home.

MELODY
So I'll stop coming into your office then.

KIM
You can still come in. We can talk about that. We can talk about your son's baseball career.

MELODY
We can talk about other things now.

KIM
Hey, I did one other quick thing, though. There was actually the NAHB did put out what's called a cost of constructing a new home. And this was all based upon 2024. They did a survey of 4,000 builders across the country. They do this periodically because they try to get a handle on what are the actual costs to build a home.

A couple of interesting takeaways, because we've said it before in our this is our seventh season. There's been many times during our six and a half seasons of our podcast where we talk about your lot cost should be roughly, what, 20% of your total build cost.

What I find very interesting here is that right now, finished lot costs are now down to 14%. And the actual construction component of building a home is up to almost 65%.

So lot cost percentage is down, and the cost of actually building the house is going up a little bit. And that's basically a reflection of since the pandemic, construction costs are up 35 to 40 percent across the board.

So something had to give and it appears that the lot is what what's giving. So for somebody for looking to build a custom home. It's going to be hard to meet that threshold of 14%. It really will.

I will say that for building a custom home, you still should try for that 20, maybe 25%. And in some occasions, if you're building a large enough home, you can make that 30, 35% as well. But I just, I thought that was kind of an interesting number.

MELODY
So when you're talking about the price of the lot being 14%, where does the utilities and the lot clearing come into play?

KIM
So that's the finished cost.

MELODY
Okay, that's what I was wondering.

KIM
Okay. Now, again, if you're talking custom home, you'll probably be above that because of lot clearing. There might be trees, there might be retaining walls or something like that for a new lot.

MELODY
So anything else that you found interesting about this study that came out?

KIM
Besides the home, that's always something that I like to follow. And obviously that it varies from year to year.

It was down during the pandemic. We had gone from a high of 2,800 square feet average back in 2018, it kind of dipped down to actually below 2,500 square feet during the height of the pandemic. But it's sneaking back up again. Almost 2,700 square feet is the size of the average home being built across the country right now. So some interesting information I thought we would share while we had everybody's attention.

MELODY
So what I find really interesting is we're starting to really see that lasting impact and, you know, what happened during the pandemic on every front, including what happened to our homes.

KIM
And it's disappointing to me because if you think about it, I just mentioned a few minutes ago, the price increase since the pandemic and construction up nearly 40 percent. And the only component that has dropped back to normal rates and normal prices is softwood lumber.

And everything else, when they took that big increase during the pandemic and they kept saying, what, supply shortages and supply chain interruption, we're going to raise our prices. They've never brought those prices back down.

Now, again, I get it, supply, demand, and if people are willing to pay it, why would the vendors, you know, adjust their pricing? I get it. It's just frustrating from my standpoint as a builder because, you know, our clients are the one that ends up paying the price.

MELODY
I wonder if that's probably why we have a little bit of hesitation with what's going on with tariffs.

KIM
That's such a great point because I think you might be right. You know, there was so much uncertainty during the pandemic, and now all of a sudden we have the uncertainty with the tariffs.

And I think you're right. People are probably taking a pause or thinking about taking a pause simply for that reason. And that's why I at least wanted to do this special episode and kind of help people understand that I think that from the construction industry standpoint, the whole tariff narrative is being a little overblown for our industry right now.

One other quick thing from that national study, I found this very interesting because a lot of times people don't understand what should we be spending for our interior finishes. And according to this new study, about 24% of the cost of construction should go into your finished materials.

Now, we're a custom builder. We have our own percentages, which is going to be a little bit higher than that. But as a general rule of thumb, I thought that was kind of interesting for people.

MELODY
And, you know, sky's the limit, but you want to make it appraised.

KIM
Excellent point. You can't. The sky is the limit, But if you don't have a reasonable budget with reasonable selections, your lender is not going to be able to have it appraised out unless you don't get the loan. So good information.

MELODY
Money is not my favorite thing to talk about.

KIM
So then we'll end this special edition of the podcast, right?

MELODY
Yeah. But if you guys have any questions about this or, you know, if new news comes out and you want to hear it addressed on the podcast, you can always email us at podcast at hibshomes.com. We love ideas.

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