Will The Trump Tariffs affect the Housing Market?
Transcription of Above Video
Today's weekly video is on the Trump tariffs. It's been hard not to watch the news as the White House Administration has gone through a surprising turn of events around tariffs. As this is an inside real estate blog, I want to share my thoughts on whether the Trump tariffs will affect the housing market. You may not know what tariffs are, but the White House Administration threatened to put tariffs on a number of countries and then ended up putting incredibly high tariffs on virtually every country and even some islands that nobody had ever heard of, on everybody, and then just a few days later, changed their mind and reduced them to a more reasonable set of tariffs. But tariffs are tariffs, and the amount of tariff pain rippling across the globe is quite large, including China, where both countries have reciprocal tariffs somewhere around 150. That's going to drive trade between the two of them down significantly. There's just no doubt about that, but the real question here is, how does any of this affect housing?
I want to say basically at the start of this video that nobody knows anything. And the reason we don't know anything is probably because a lot of the folks in control of the tariffs don't seem to have a plan. I mean, it sounds unkind, but it's very hard for me to believe that this is all part of some sort of master plan. There's just too much at stake for any of this to sort of be some sort of plan. This isn't really how stuff is typically done, which is what makes it so interesting and fascinating at some level and so incredibly terrifying at another. So, I'm going to just start off by saying no one really knows where this is going to go because, for example, as far as tariffs go, we get a lot of lumber from Canada. Now, normally, you wouldn't think that we would have a trade war with Canada, but only time will tell if this entire process will get more rational and predictable. But for right now, the only things that are certain are that things are uncertain, and the second thing that is probably certain is that buyers do not like uncertainty.
I've been selling real estate for 22 or 23 years, and I can tell you without fail that if buyers are watching headlines, then they are not looking as closely at the housing market as they might otherwise have been. Now, that doesn't mean that they're not going to buy houses, but they will probably be less aggressive in their bidding. So, there will probably be fewer offers made on properties, and the bids will probably be less aggressive, and that is because the future is uncertain. And people really don't know how that uncertainty is going to translate going forward. This is my attempt to show everyone where the pain points are in the housing market to see if we can talk about where the tariffs might show up the most or the kinds of things that people should look for in order to see if the Trump tariffs are having an effect on the market. From an overview, we're going to talk about four ways tariffs might impact the market. We're going to talk about new construction, interest rates, inflation, and then the possibility of recession. All four of those things have been in the news this week, they are all very real players in secondary impacts of any sort of tariff scenario.
I'm going to start off with new construction. Now, new construction is not a huge component of the real estate market. There are a lot of houses, but relatively very few new houses, but it is watched because ultimately, builders' costs get passed on to consumers and the higher those costs get, the harder it is for consumers to buy new construction, which tends to create new construction overhang, more houses for sale that are being built because builders don't build them in onesies and twosies. Most builders build a whole bunch of houses at once and then hope to sell them as they go along. Will tariffs affect new construction? Well, in my earlier example, I said that if we attach a lot of tariffs to Canada, that's going to affect lumber prices. I think the good news for housing is that a lot of things are either primarily made locally or mostly made locally or entirely made locally. Things like concrete, asphalt shingles, and windows. A lot of these supplies are made right here in the good old USA, either mostly or completely, and so we're not really likely to see a lot of impacts from tariffs on that—they're already here. They don't get taxed for being shipped here. But there are still a lot of things in houses that are going to get taxed, and they will increase builders' costs. So, those things are going to be everything from wiring to insulation, lumber obviously as talked about, and a lot of the finished materials have some sort of Chinese component. And right now, those tariffs are very high. The good news in the short term is that most places have stocked up on these materials, and builders really won't need to feel the pain, probably for a couple of months. But if these tariffs stay in place, without a doubt, builders are going to have to start to buy more supplies from the places that they are, and that includes China. If some of these things are sourced in China, it's going to drive up their costs, which they are going to attempt to pass on to consumers. This process is not going to be fast. This is something that we may be talking about at the end of the year in September or so, when these types of effects will really start to show up. And it's, as noted, it's really difficult to know if the tariffs are going to stay in place for that long. It's not really in either country's interest to have tariff levels this high for an extended period of time. This is going to cause a lot of pain for both parties. So, hopefully it won't really happen. And in the short term, I don't expect builders' prices to go up, but this is definitely something that we'll want to be watching as the trade wars, which are here officially, if they continue to heat up and they continue to limit buyers' ability to source goods from places that they have previously.
Moving on to the second piece of tariffs' secondary impacts, we're going to talk about interest rates. Now, unlike new construction prices, interest rates affect everything, and there is a lively debate out there about what is going to happen to interest rates based on inflation. You have sort of a classic push and pull between the Federal Reserve's two main mandates. For those who don't know, the FED basically has two things that they try to do at the same time, even though they are generally polar opposites. They try to have low inflation and they also try to have high employment or low unemployment. So generally, if you have employment that is really high, that starts to stoke inflation. It's not the only way to stoke inflation. There are other ways and tariffs are one of them. So tariffs without a doubt are going to cause a spike in inflation. Now, I'm not even going to begin to pretend to figure out how much of a spike in inflation tariffs are going to have, because again, until you actually know how much the tariffs are going to be, and they need to be that way for an extended period of time before people have to start sourcing these materials and these products from these places that are being tariffed. But if they go on long enough, and if the tariffs are high enough, there is no doubt that prices are going to go up on a range of goods. Now, is this going to happen in three months, four months? Again, we still really don't know, but it is going to happen if the tariff wars go on. The more inflation goes up, the more difficult it will be for the FED to lower rates. And they have basically said as much this week. They said, we sort of need to know where everything is going before we can make decisions about rates. I think the FED is very optimistic that had the tariffs not gone in place, then we would have continued to see inflation fall. If inflation had fallen, I think very much, the FED would have been happy to cut rates by two or three or even four times this year, which is almost the full point that obviously would be very, very positive for the housing market, especially if job numbers haven't really been affected. But now, with the tariffs on, it's unclear what the FED will have to do. They will sort of have to pick whether or not to support the job market by lowering interest rates or to fight off inflation by keeping interest rates high. My bet is, if the tariffs have a significant inflationary effect, there is no chance that the FED will be dropping interest rates, even if they are transitory. So, there's going to be a lot of pressure here on the White House to get results quickly, because the one thing that they would really like to see happen is the FED drop interest rates, and the FED isn't going to do that as long as inflation remains elevated, which the tariffs most definitely are going to do.
So, what happens if inflation keeps going up and the FED doesn't move interest rates? Well, then what we have is a recipe for a recession. So, a recession will most definitely affect housing, although maybe not in the way a lot of people would like to see it. When you have recessions, typically recessions are characterized by decreases in spending, but those decreases in spending are driven by job losses. Job losses mean that people will sell their houses
All been through recessions. I think most of us who are watching this video have been through a couple of recessions, so we know that this is how it is a certain percentage of people are going to lose their jobs. They're going to have to relocate. And a certain number of people are going to have to sell their houses. In order to do that, if you have this kind of force selling, which we get in recessions, then you're going to see the supply go up with interest rates elevated the way that they are. It is very easy for me to see that such a thing will probably pull prices down. But before every buyer out here says. Thank God housing prices are going to go down. We are a very long way away from having a recession right now. The economy is still growing. We would need to see job numbers over the next several months. Not just not be positive, but we need to see them start to go negative. And right now, there really isn't any evidence that that is going to happen. Part of that is because the terrorists have only been in effect for a week, and there's those effects have been moderated. A lot of companies right now probably aren't going to do as much hiring as they would have done, but they aren't going to do any firing either, so we're not going to see a lot of job losses, not until companies really start to feel some real pain, which I don't really think they're going to see right now. So, I think the forecast, I think for housing is that, uh, things will probably be a little bit more moderated. I think the buying Community will be more uncertain, and they will be more hesitant about stuff. But until we really see job losses, the supply, which is the main part of the problem. In the Northeast area is likely to follow the pattern of the last couple years, which is just that. There won't be enough Supply. So, with that said, I think the housing market will remain largely unaffected by the tariffs. You know, again, a lot of these secondary effects, whether they be interest rates or inflation or recession. We really won't see any of this stuff for months, and with this spring Market, basically here today and already starting. Uh, it's unlikely to have any effect until well past June or May again. You have to remember the average person selling their house or buying a house has a very high level of motivation with the amount with the interest rates where they are in order to solve whatever problem they're trying to solve. Some headline news isn't going to change whatever Pro that problem is. They're going to continue to need to buy or sell, and so if things calm down even a little bit, I think we'll probably see a fairly active and aggressive housing market for the next several months. All bets are off. If the tariffs continue to climb and the longer they stay on, the more likely we are to see effects that are negative.
For home sellers, but positive for home buyers, but in the meantime. This is where we're at, so I hope everyone enjoyed this video. And if you have any questions, leave them in the comments.
