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Housing stocks take a hit from Trump's lumber tariff

  • The iShares U.S. Home Construction ETF (ITB) fell about 1 percent Tuesday after the tariff was announced by the Trump administration, led by losses in PulteGroup and Toll Brothers.
  • Lumber accounts for as much as 12 percent of the cost of a new home, according to an analyst.
  • Futures on lumber fell despite the tariff as traders took profits on the news after sizable gains this year.

Homebuilder stocks fell on Tuesday on concern new tariffs by the Trump administration on Canadian softwood lumber imports will raise costs.

The new tariffs average to about 20 percent and were announced Monday night.

The iShares U.S. Home Construction ETF (ITB) fell about 1 percent Tuesday. PulteGroup's stock closed down almost 4 percent, and Toll Brothers shares ended the day nearly 1 percent lower. PulteGroup also said its first-quarter results missed analyst estimates.

Shares of D.R. Horton also pulled back, closing down over 1 percent.

"We expect builders to attempt to combine surcharges to customers with some
acceptance of lower margins as a way of coping," wrote Carl Reichardt of BTIG in a note Tuesday. "Expect stocks to react negatively today with volatility to come as this issue plays out."

The analyst notes that lumber accounts for 8 to 12 percent of the cost of a new home.

The trade action, the culmination of a long-running dispute between the two countries, wasn't totally unexpected as lumber futures have surged already this year in anticipation of a possible escalation of this sort by President Donald Trump and U.S. Commerce Secretary Wilbur Ross.

"The reason we're putting it on is because Canada's forests are owned by the various provinces and the provinces charge very discounted … prices to the lumbermen, which in turn lets them get subsidized low prices coming into the U.S.," Ross told CNBC's "Squawk Box" on Tuesday.

"It seems unfair because in the U.S. most of the forests are privately owned and, therefore, they pay full market price," he said.

Lumber futures for May delivery fell 2.53 percent Tuesday to $385.10 per thousand board feet as investors took profits after the already blockbuster year for the commodity.

"Lumber futures should move higher, but this announcement has been anticipated," said Brian Kelly of BKCM. We "might get a sell the news" event.

Lumber futures are up more than 20 percent this year.

"It was priced in a couple weeks ago when there was talk the tariff was going to happen," said Daniel Flynn, trader at The PRICE Futures Group. "Markets tend to overreact on a headline. Right now, nervousness" in the market.

Canadian lumber stocks, on the other hand, rose sharply, including Canfor shares, which popped more than 6 percent.

—CNBC's John Melloy and Evelyn Cheng contributed to this report.

Watch: US will pay more for homes, says Canadian CEO