Post-Election Policy Update: Twin Forces Facing Devonshire Real Estate

In our pre-election analysis, we explored the potential impacts of an import tariff and a reduction in the corporate tax rate on the housing market. Now that these policies are taking shape under the Trump administration, the stakes are clearer: without significant tax cuts, the contractionary effects of tariffs could risk a broader economic slowdown. Tariffs raise government revenue without increasing spending, effectively withdrawing money from the economy. To offset this, the administration must follow through on its promised tax cuts to stimulate growth and avoid recessionary pressures.

This article revisits the anticipated effects of tariffs and tax cuts on Devonshire’s housing market, offering a supply and demand analysis while highlighting real-world strategies employed by U.S. homebuilders.

Part 1: The Impact of a 25% Import Tariff on Devonshire Housing Market

• Key Assumptions: Imported materials, such as lumber and steel, are critical components of construction costs. The tariff increases costs for builders, particularly those reliant on imports. Builders respond by either raising home prices, reducing construction, or seeking alternative solutions.
• Mechanism of Impact: The 25% tariff will not directly increase home prices by 25%. Since only 40% of materials may be imported, the overall cost increase for construction materials might average around 10%. The tariff pushes the supply curve leftward, reflecting higher costs and reduced construction activity. Increased construction costs lead to higher home prices, which could dampen demand.
• Insights from Homebuilders: Major homebuilders like Lennar and D.R. Horton are mitigating the impact by pivoting to domestic suppliers and using economies of scale. However, smaller builders face greater challenges. The National Association of Home Builders (NAHB) warns that tariffs act as a "tax on housing," exacerbating the affordability crisis. However, builders are adopting innovations like modular construction and using financial hedges (e.g., lumber futures) to stabilize costs.
• Visualizing the Impact: Higher material costs shift the housing supply curve to the left, raising prices and lowering quantities.

Part 2: The Effect of Reducing the Corporate Tax Rate to 15%

• Key Assumptions: Lower corporate taxes increase post-tax profitability for builders. Increased capital availability enables developers to fund larger projects and expand supply.
• Mechanism of Impact: A reduced corporate tax rate lowers fixed business costs, allowing developers to reinvest in land acquisition and construction. This boost in profitability can accelerate housing supply growth.
• Expected Effects: The tax cut shifts the supply curve to the right, reflecting increased housing availability at potentially lower prices. Increased housing supply helps stabilize prices, supporting demand growth.
• Insights from Homebuilders: PulteGroup and other large builders have used past tax savings to expand operations, reinvest in land, and develop new projects. Such moves highlight the role of tax relief in fueling medium- to long-term growth in housing supply.
• Visualizing the Impact: Lower business costs from the tax cut shift the supply curve outward, reducing prices and increasing quantities.

Conclusion
Devonshire’s housing market stands at a critical crossroads. The interplay between the tariff’s cost pressures and the potential relief from corporate tax cuts creates a complex dynamic. The Trump administration faces a pivotal moment: delivering on large tax cuts is not just a political promise—it’s an economic necessity to counteract the contractionary impact of tariffs.

For builders, strategies like sourcing diversification, financial hedging, and operational efficiencies will be key to navigating this landscape. For policymakers, balancing tariffs with robust tax relief is essential to sustaining growth.

Stay tuned for further updates and expert insights in Devonshire Real Estate Quarterly.