Will trade wars help or hurt?
The Trump Administration is currently involved in several trade wars, including one with China and one with Mexico.
With China, the US instituted tariffs for alleged unfair trade practices; China then levied its own tariffs against the United States.
With Mexico, Trump had threatened harsher tariffs unless the country halts its flow of immigrants in the United States (Mexico recently agreed to this demand).
These moves raise a big question going forward: What will each trade war’s effect on housing be?
The answer, say the experts, is it depends. These trade wars may make it easier to afford a mortgage loan and purchase a home. But they may jack up the price of new construction and remodeling.
Following is what you can expect of the housing market during and after the trade wars.
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The possible positives
A trade war’s effect on housing could be positive, some pros concur. Robert R. Johnson, finance professor at Heider College of Business, Creighton University, explains why.
“The specter of tariffs and escalating trade wars between the US and China and the US and Mexico have weakened our economy. It has also lowered anticipated GDP growth. This has led to US Treasury rates falling, leading other interest rates—including mortgage rates—lower. Economic weakness will put further pressure on the Federal Reserve to cut interest rates,” he says.
In fact, Johnson adds, the CME FedWatch tool indicates that the probability of a Fed rate cut by December of this year is 98 percent.
The CME FedWatch tool indicates that the probability of a Fed rate cut by December of this year is 98 percent.
Ryan Merritt with Quontic Bank says the trade wars have been a boon to home buyers.
“As the rhetoric around the trade wars has ratcheted up, the markets have taken a defensive position. As a result, interest rates have begun to fall on anticipation of an economic slowdown,” says Merritt. “As rates move lower, borrowers can afford more home or their borrowing costs are reduced.”
Tariffs have already taken a toll on our real estate market, in some cases for the better. That’s the belief of Diana Hill, director of real estate education for Online Trading Company.
“I see the effect more concentrated on the commercial and building sector than the residential sector. Chinese investors are pulling back on US real estate investments,” she says. “That could put downward price pressure on some classes of real estate.”
In other words, it may lead to lower home prices in some markets.
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The undesirable downsides
On the other hand, many worry that a trade war’s effect on housing could be negative.
“This is not a good thing for buyers or sellers,” cautions Lawrence Yun, chief economist for the National Association of Realtors. “It could lead to further trade war escalation. That will steadily shave GDP growth. And it may even tip the economy into a recession.”
A recession would lead to loss of jobs, of course.
“Losing jobs hurts people’s finances,” Yun adds. “But more importantly, it hurts confidence in major expenditures, even among those with jobs.”
Yun says the trade wars could lead to lower interest rates. “But the rate decreases are for the wrong reasons—weakening economic conditions. It’s better to see lower interest rates with economic growth and low inflation,” says Yun.
Rob Dietz, chief economist at the National Association of Home Builders, also believes the trade war’s effect on housing will be harmful. He noted in a recent interview that consumer confidence seems to be weaker than identified. And he said a trade war ramps up housing uncertainty.
“We estimate that the 25% rate on the existing set of tariffs represent a $2.5 billion annual tax increase for the housing sector in terms of materials used for construction. A trade war will also hurt sectors of the economy, like agriculture, and increase overall consumer wariness,” Dietz said in that interview.
Put another way, the trade wars are making it more expensive to remodel existing homes and build new ones. That could price lot of buyers out of the market. It could also make it harder to build affordable starter homes for first-time purchasers.
What to consider now
The trade war’s effect on housing—good or bad—doesn’t mean you have to change your game plan as a buyer or seller. Some experts caution against rushing to buy sooner to avoid price hikes or waiting longer until rates drop further, either.
“Attempting to time the real estate market is a loser’s game,” says Johnson. “If you’re a buyer and have flexibility—meaning you don’t need to purchase right now—you may benefit from waiting for additional weaknesses in the real estate market. These weaknesses could happen as a result of heightened trade tensions with China.”
Yun predicts that major damage from these trade wars will be averted. So if you’re hoping these trade wars escalate in order to help your real estate goals, you may be disappointed.
“It’s in no country’s best interest to go into a full trade war. Small tariffs here and there for political symbolism can be absorbed by the economy. This is the likely outcome,” says Yun.
Hill, on the other hand, says you may want to buy sooner if you’re looking at new construction.
“I’ve personally seen construction costs increase over 25 percent in six months,” she says.
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