Trade Wars and Residential Real Estate
Trade wars. They are the talk of current events. We read about them in the newspapers and magazines, and hear about them on tv, podcasts and the radio.
The imbalances between several of our trading partners need to be addressed, and the hope was that a fair and balanced trade deal with China would be struck in the first half of 2019. This has not happened, and there seems to be less likelihood that a deal will be reached any time soon. So why should we care? How will a trade war with China and perhaps other trading partners impact residential real estate? Here are some of my thoughts: 1. Trade wars create economic uncertainty, and markets don't do well in times of economic uncertainty.
2. When individuals are ill at ease, they opt to 'wait and see' rather than make large purchases. They hold back out of fear that their wealth may decrease. So far, the trade war with China has resulted in approximately $5 trillion in stock market losses. Locally, residential real estate sales volume is way lower than it has been. Coincidence? Hardly.
3. The word 'war' instills fear and worry. Markets are driven by mood; a trade "war" is anything but a mood-lifter.
4. We are a country that attracts foreign real estate buyers, and New York City's luxury real estate market over the past few years was fueled by foreign investors. Not this year. Talk of trade wars makes foreign buyers feel unwelcome and anxious. Chinese investors had been our single biggest home buyers over the past 6 years, and the Chinese have virtually vanished from today's residential real estate landscape. Incidentally, Russian, Middle Eastern and South American buyers have also disappeared.
5. Trade wars result in tariffs....another word for a tax that is mostly picked up by the consumer. Today's tariffs have had a significant effect on the supply and cost of construction components and raw materials, eroding home affordability.
6. Higher prices of materials leads to higher prices for goods and services in general which may lead to inflation. Inflation causes incomes to rise....including those of construction workers and everyone who makes the products that go into building and renovating homes, further adding to increased costs and rising prices.
7. If prices trend upward leading to inflation, interest rates could also rise, which is never good for real estate markets. Higher interest rates may result in higher monthly carrying costs for homes which erode purchasing power and lower transaction volume. Higher interest rates add to the cost of servicing corporate and personal debt which can take away from hiring, spending and investing. As goes Wall Street, so goes Main Street. As our world gets smaller, turbulence in the global economy directly and adversely affects our local real estate market. Let's hope fair and comprehensive trade deals are reached soon. Until then, we continue to experience a strong buyers market. Buyers - step up and take advantage!