As experts attempt to predict the impact of a trade war on the economy, most agree that there will be both upsides and downsides for real estate.
Here’s a summary of recent developments on the trade war. During trade talks, China refused a deal on U.S. agricultural products. That triggered an order from President Trump to impose an additional 10% tariff on the remaining $300 billion worth of Chinese goods not yet subject to tariffs. After that, China devalued its Yuan, and is now threatening to do more of the same if the trade war drags on.
When the Yuan is worth less, the dollar is worth more. That makes U.S. exports more expensive, and Chinese imports to the U.S. more affordable.
Worries of a prolonged trade war and global recession spooked investors last week, resulting in a stock market sell off that marked the largest one-day decline since February of 2018. But the next day, the market recovered from traders looking for a deal, until central banks in India, Thailand and New Zealand announced unexpected rate cuts. Stocks suddenly dropped again, creating another buying opportunity for courageous investors — and the market bounced back.
How have real estate investors fared through all this stock market volatility?
Lower Mortgage Rates
Investors worldwide tend to flee to the safety of bonds and mortgage backed securities during times of uncertainty. When there are more buyers for bonds, yields go down. That usually translates to lower mortgage rates as well as investors looking for the safety of mortgage-backed securities.
As of this morning, the 10-Year Treasury hit new lows of 1.695% and mortgage rates dropped to 3.6% for a 30-year fixed-rate mortgage, as of August 8th. (1) That’s a 15-basis-point drop from the week before.
Low rates are great for anyone buying real estate or wanting to refinance. It’s also very good for buy-and-hold investors wanting better cash flow by lowering borrowing costs. Mortgage brokers are also benefiting with more refinance business.
The National Association of Realtors chief economist, Lawrence Yun, pointed out in a HousingWire article that while low mortgage rates are good for housing, they are down for the wrong reasons. (2)
The upheaval on Wall Street isn’t necessarily the best catalyst for lower mortgage rates. NAR’s Lawrence Yun says, “It’s better to see lower interest rates with economic growth and low inflation.”
Less Competition from Chinese Buyers
Another upside to the trade war might be that there are fewer Chinese buyers competing for U.S. real estate. Over the past year, there’s been a 56% decline in real estate purchases involving Chinese buyers — likely due to a directive from the Chinese government encouraging more investment at home and not overseas. (3)
Less competition from Chinese buyers has helped slow down the rapid hike in U.S. property values. That’s good for buyers who have had to compete with all-cash offers over asking price for the past decade.
It may not be as good for sellers in areas where the Chinese have historically bought — mainly in higher priced neighborhoods in California and New York.
Uncertainty in the Housing Market
Chief economist for the National Association of Home Builders, Rob Dietz, believes the trade war is bad for the economy and housing because it can erode consumer confidence and create uncertainty in the housing market. He says it will also increase construction and remodeling costs.
Dietz told The Mortgage Reports, “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.”
It’s not clear how much pain the new tariffs will add to the cost of housing, but the National Association of Home Builders says, the real problem is regulations — that account for about 25% of the price of a single-family home.
If a trade war continues to take a toll on the stock market, luxury homes may have more exposure, but Lending Tree’s chief economist, Tendayi Kapfidze, believes that the construction of lower-priced homes will take a hit as well. “Already thin margins will be trimmed even further, which will make it even more difficult for builders to afford to bring on more affordable housing. It will also “exacerbate the inventory challenge at the lower end of the housing market.”
Tariff Totals for Consumers
However, there are mixed reviews as to whether the tariffs are really causing inflation.
Investment advisor, Louis Navelier said in a Seeking Alpha article, “Predictions of inflation, slower growth and recession due to high tariffs are two years old, yet we’ve seen 3% growth and 2% inflation so far — except in China, where our tariffs are slowing Chinese growth and fueling inflation there…”
He added, “With a strong dollar, a devalued yuan and some cost absorption by middlemen, prices have been stable. The main upward pressure on inflation lately has come from energy (of which, the U.S. is self-sufficient), housing and health care, which are domestic industries. Inflation has not been mainly import-generated.”
A trade group with a differing opinion, called Tariffs Hurt the Heartland, says that American consumers have paid more than $27 billion in additional import taxes since the trade war began in June of last year. The group says, Americans paid $6 billion in tariffs during the month of June, which is one of the highest monthly tariff totals in U.S. history. It’s about 74% higher than the same month last year.
Group spokesman, Jonathan Gold, says, “Americans are already paying record-high tariffs, and the biggest hit to consumers is still to come on September 1st.” That’s when the new 10% tariff is supposed to kick in. Gold says, “These tariffs are costing American jobs, raising prices, hurting farmers and derailing U.S. economic growth.” Retaliatory tariffs by China on U.S. exports have also led to a 17% drop in those exports.
Still, farmers appear to be sticking by Trump, according to CNBC. The latest producer survey conducted last week by the Purdue Center for Commercial Agriculture showed a record-high 78% of farmers said they believe the trade war will ultimately benefit U.S. agriculture.
In order to offset the affect of the trade wars on US farmers, President Trump announced a Market Facilitation Program last summer, promising to disburse $12 billion in direct payments to growers. As of May of this year, more than $8.5 billion has been distributed from the program to soy, corn, wheat, cotton, and sorghum growers, according to Reuters.
Uncertain Times Ahead
Here are my thoughts on it:
As long as China continues to devalue its currency, the tariffs may not have the impact on trade that the president seeks — which is why we will likely see the Trump administration push harder for a bigger rate cut from the Fed in September. There is now a strong chance it will happen.
Should all this scare investors away from real estate? Not at all. While stock market investors may be feeling the ups and downs of political wrestling, the need for a place to live has not changed.
U.S. housing is on solid ground. Foreclosure starts are low, homeowners are locked into low monthly payments, and property values have increased. Even if a homeowner lost his or her job, they might not be in a hurry to walk from their home, just to pay higher rent somewhere else and leave all their equity on the table for banks to enjoy.
Rents don’t fluctuate much. During the last recession, those of us who sold our high priced bubble properties and exchanged them for low priced, high cash flow properties in job-growth markets did not even feel the recession in those areas. Regardless of economic ups and downs, most people prefer having a roof over their head — and they will pay for it.
There is growing demand for affordable housing — and savvy investors who are able to provide that can still get 6-8% returns — or more if they take on long-term, low cost debt.
As Warren Buffet famously says, “Be fearful when others are greedy and greedy when others are fearful.” Right now, many people are falling for misleading headline news.
You don’t have to settle for 1.7% returns in Treasuries when you can get 6-8% or more on cash flow tied to real estate. You can also get incredible tax breaks, that further increase returns, while also having someone else pay off your debt.
It’s a great time to take advantage of the opportunity to lock in low interest rates on properties that have fewer buyers than last year at this time. You can get a better price, lower rates, and higher cash flow today — with growing demand for rental properties.
I’m not alone in this thinking. Economists have previously said they don’t expect the next recession to result in a big drop in home prices. They suggest that waiting around for something like that to happen might leave potential buyers empty-handed, and disappointed.
(1) Mortgage Rates