You, me, and International Tariffs.
Just before the walls started to close in around Luke, Chewy and Leia... Han muttered the iconic phrase, “I’ve got a bad feeling about this..."
Unless the soaring housing prices have caused you to live under a rock, you’re probably aware we’re in the early stages of what some experts are calling a ‘trade war’. On July 3rd, the administration of President Donald Trump officially imposed tariffs on $34 Billion worth of Chinese goods. There are threats of tariffs as high as $800 Billion across the globe. What impact will this have on our daily lives? Our economy? And most importantly, the housing market!?
Before this past Friday, Americans felt the cost of doing business globally almost exclusively through their income tax. Rather than paying higher prices for the goods being imported into the U.S., we’ve had some of our income taken off the top to be able to fund the federal government and keep our borders open to free trade. However, now consumers will be subject to both income taxes and tariffs on imported goods to the second largest economy in the world, China. Who also happens to be our largest trading partner outside of the European Union. And whom we owe 1.18 TRILLION dollars. But who’s keeping score, right!?
It is expected that the increase in the cost of goods imported from China will be felt across almost all of the American markets, with the most effected being the technology industry. If you think about how much we rely on ever-evolving technology, you can imagine the impact this could have on our economy. The U.S. GDP could initially fall as much as .1%, which would result in nearly 100,000 jobs lost to outsourcing.
This tariff comes on the heels of the tariff on Canada, Mexico, and the E.U. on steel and aluminum imports (25% and 10% respectively) that was imposed at the beginning of June. Because home builders’ options for materials have been shaped to increase the cost of goods, they will be forced to make these homes for higher prices to subsidize this cost. Ultimately, it will result in homebuyers paying more money for the same amount of product.
So, if we have less people in the workforce, Americans have less income to spend specifically on housing, and the cost of homes are going up, this doesn’t create a positive environment for the housing market. The percentage of homeownership could certainly see a decrease due to reduced spending power possessed by the American people.
That is, if the interest rates continue to increase as expected. The ultimate impact on the housing market will be determined by the economy’s response to these tariffs. Many experts have forecasted two additional federally imposed rate hikes before the end of the year 2018, although they currently sit at the lowest they’ve been in three months. In past times of economic hardship, we’ve seen rates artificially reduced to stimulate the economy. If these tariffs continue to increase, don’t be surprised if that is the case.
Rates sit about 50 basis points higher than they were this time last year. We’ve already seen two rate increases, but now the government may have to step in once again to keep rates low to combat significant damage to the housing market. What it comes down to is if Americans feel the negative effects from this trade war in our wallets, rates could continue their recent trend of decreasing. If these tariffs stay at lower levels and do not significantly increase, I would expect the forecasted higher rates to stay true to their projections.
Over the next few weeks, the effect these tariffs will have on the economy and the housing market should become clearer.
I'm not sure if R2-D2 can save us from impending doom like he did for his friends on the Deathstar, but hopefully someone can bring balance to the mortgage industry.
Until next week,
The opinions expressed in this post are the sole view of the writer and do not reflect the opinion of Princeton Mortgage Corporation.