Congratulations! You’ve just put your house on the market for the first time!
And then you turn on the news. “Trade War Gets Murkier…”
The news is full of dark omens. Pundits everywhere spew doom and gloom.
Suddenly you’re worried. What if prices tumble before it sells? Should I pull it off the market and wait things out?
It’s time to take some advice from The Hitchhiker’s Guide to The Galaxy. “Don’t panic.”
Let’s take some time to understand the trade war and what it means for the housing market. No matter if you’ve just bought a house, you just put it on the market, or you’re considering a new home soon, this article is for you. Scroll on to understand.
1. A Brief History of U.S. Trade Wars
Trade wars aren’t a new invention by contemporary politicians. Since the Romans invented paved roads, nations have disagreed on trade rights. At times, trade wars ignited full-scale conflicts and at others, they fizzled out with negotiations.
The U.S. is no stranger to trade conflicts with other nations. Our nation began with a trade war, or really a trade civil war.
The Boston Tea Party
When your government decides to raise taxes, you hope it’s because you asked for it. You also hope the money is going to benefit you in some way.
Neither of these things was true when Great Britain levied taxes on almost everything going into and out of their colonies in the “New World.” Following the Stamp Act of 1765 and the Townshend Acts of 1767, colonial citizens were so angry they staged violent political protests.
Parliament back-peddled on these acts but left in place a tea tax. They quickly learned not to mess with a British person’s tea. The colonies boycotted the British East India Tea Company and eventually dumped $1 million (today’s dollars) worth of product into the sea.
Great Britain did not rollover. They closed Boston Harbor, stopped free elections in Massachusetts, and began requiring colonists house British soldiers (who had an increasing presence in Colonial America).
Soon, the colonies declared their independence and a revolution began which opened the door to a new nation.
The Smoot-Hawley Act of 1930
Fast forward 150 years. We’ve just been through one of the most prosperous eras in U.S. history. And then the economy crashed.
Not only did major industrial industries suffer, but U.S. food growers suffered as well. And as any living creature knows, a lack of food is a bad thing.
If the farms go under, we all suffer. Thus President Hoover set out to buoy domestic prices by placing tariffs on agricultural imports.
A couple of Senators, Smoot and Hawley decided to capitalize on the President’s proposal by pork-barreling their own legislation. Legislation which targeted the industrial market with tariffs.
This triggered a trade war with many of our allies and stalled our economic recovery. This trade war tanked Hoover’s popularity and the nation elected FDR instead.
Trade War With Japan
The best trade war to hold up against our current situation would be the 1987 trade war with Japan. President Reagan doubled the import prices on $300 million of Japan’s tech exports.
Why? Because Japan was manipulating its currency, subsidizing its own companies, and erecting stiff barriers to import through tariffs. This trade war lasted almost a decade and ended when the two countries made an accord to abandon fixed exchange rates.
But there’s a key difference between the current trade war and the trade war of the 80s. China isn’t a treaty ally. China is a major competitor to the United States under a dictatorial leader.
This game is a bit hotter than what you see with allies such as Canada or Mexico (we’ve had trade disputes with both in the past).
This difference defines the range of effect on the U.S. market. And here is where we find a reason to examine its influence on the real estate market.
2. Looking on the Bright Side of the Trade War With China
Not everything in a trade war is doom and gloom. At times, the people come out on top.
If you already own and you’re not going to sell for a while, this trade war might be a boon.
For a time, because of the booming economy, we predicted a rate increase by the Fed. Now that the trade war has slowed GDP growth, it’s looking like the Fed might go the other way with interest rates including mortgage rates.
This means that people who are looking to buy will be able to afford a larger house. It also means people who already own and aren’t going to sell can refinance for a lower rate.
If you’re looking at commercial real estate, the trade war might help you as well. Chinese investors are backing off on U.S. real estate investments. This means a downward pressure on the commercial real estate and building sectors.
This will likely be a good time to jump in on those markets if you’re a commercial real estate investor. Who knows; when the market picks up you might be rolling in money.
3. Bad News: Foreign Buyers Less Likely to Buy Here
China has been the top foreign buyers of residential homes in the United States for the last six years. Even as the trade war raged, they bought with gusto.
For the longest time, Chinese buyers seemed almost agnostic when it came to politics. The relationship between the U.S. and China didn’t slow down Chinese investments in residential real estate.
Back in January, we were even seeing an increase in middle-class buyers from China. Traditionally it’s been difficult to secure a mortgage in the United States as a foreign buyer.
Most mortgage companies required foreign buyers to put down at least 50% of the home price before they would fork over the cash. When foreign homebuyers increased, the market supplied. Some mortgage brokers began to specialize in foreign buyers and made it easier to secure a loan as a foreign national.
Tides Are Turning
But the tides have been turning over the past six months or so. As the trade war has become more intense and relations with China have deteriorated, we’ve begun to see a dip in foreign buyers from China.
In the first quarter of 2019, Chinese buyer inquiries dropped by 27.5% from the year before. The Chinese are moving to friendlier countries like Australia, Canada, the UK, and Japan.
The trade war isn’t the only thing affecting Chinese decisions in foreign property investment. Travel warnings are going out from both countries.
Would you invest in a place you may not be able to travel to in the future? We wouldn’t. What if someday you can’t access your investment?
4. The Other Downsides to the Trade War
One thing you might not realize affects the real estate market is consumer confidence.
The Consumer Confidence Index measures how pessimistic or optimistic consumers might be in regard to the future of our economy. If they are optimistic, they’ll buy more goods and services. If they’re pessimistic, they’ll buy fewer goods and services.
This applies equally to how people buy properties.
Let’s say you’re confident the economy will continue to grow. You have the means to put down on a house. You’re now more likely to make that big decision.
What if you aren’t so sure about the future of the economy? You’re seeing signs it might recess. Even if you have the means, you might hold off on buying until housing prices drop.
The trade war is driving up the material cost for new construction. Even “cheaper” homes will be too expensive for some first time home buyers.
If fewer people want to buy new construction, developers will build fewer homes. This, in turn, slows down the market even further.
And if you already own a home, material costs will affect whether you can remodel your home. Were you saving for a remodel with the plan to sell? You might end up holding off on the remodel and ultimately the sale of your home.
Inflation is another factor pricing out new home buyers. As the dollar’s worth drops, it will cost more to buy. But it will cost more to rent as well.
If you’re a renter, you might end up living paycheck to paycheck because you’re using over 30% of your income for rent. You no longer have the ability to save money for a downpayment.
Should You Change Your Plans Because of the Housing Market?
Timing the housing market is a loser’s game for buyers. You don’t know the future.
Betting on worsening relations with China could land you in hot water. What if the market picks back up?
As a seller, waiting for the trade war to die out could also be a dastardly decision. What if the trade war turns into a full-scale conflict? Then the economy tanks and your property becomes worthless.
If you’re planning to sell, sell. If you want to buy and have the means, buy.
But before you buy, apply for a mortgage and know your means. We’re here to help you finance the home of your dreams no matter what’s happening in the world.