Trade War and NJ Real Estate Market

Import costs, consumer confidence, mortgage rates

by Sharleen Yuan

Experts have been discussing the impact of the trade war on the U.S. economy since last year. While most agree that there will be both upsides and downsides for real estate, it is the recent escalation of the trade war, starting with China’s refusal of a deal on U.S. agricultural products, then followed by Trump’s retaliatory measure of additional 10% tariffs on $300 billion worth of Chinese goods beginning on September 1st, responded with China devaluing its Yuan, that spooked investors in August, resulting in stock market selloff that marked the largest one-day decline since February of 2018.

Now, it is not just the U.S. economy that concerns consumers and investors, but a prolonged trade war and a global recession. Central banks in India, Thailand, and New Zealand announced unexpected rate cuts, adding additional catalysts to stock market volatility.

The Positives

Lower Mortgage Rates

During economic turmoil, investors tend to dump stocks and flee to safety assets such as Treasuries and agency mortgage backed securities. Higher demand for bonds translates into lower yields.

Additionally, the Fed cut its benchmark interest rate by a quarter point on July 31st, marking a dramatic shift in monetary policy. As of 8/27/2019, 30-year fixed rate mortgage is in line with 3 year lows at 3.59%, a 19 basis point drop since August 1st.

Lower rates benefit primary home buyers who typically finance. However, it may not help second homes, investors, and international buyers significantly, because they tend to use cash and are sensitive to higher home prices. Interestingly, both groups, standing on the sideline, all wish for further rate cuts, or home price decline in case recession does happen in a year.

Will that happen? No one can predict the future precisely, but one thing is certain - mortgage rates have already declined notably and are likely to continue to remain as long as the uncertainty and trade turmoil persists,” Danielle Hale, Chief Economist of realtor.com said. Speaking of further rate cuts, we don’t have as much room to play because mortgage rates are at historical low already. In the 70’s the Fed cut rates down from 12% to 3.8% to stimulate the economy; in the 80’s rates went down from 18% to 8%; in the 90% rates were cut from 8% to 3%; in the 2000’s, rates were cut from 6.5% to 1%.

Putting aside historical data points, Fed chairman Powell is calling the recent rate cut a “mid-cycle adjustment”, which means it is 1-2 cuts and done. Many traders interpret this as the last rate cut of the year and not the launching of a full-fledged stimulus. Obviously the FOMC still feels strongly that the economy is resilient.

Lower Competition from Foreign Buyers

Another side effect of the trade war might be that there are fewer foreign buyers competing for U.S. real estate. Information by the National Association of Realtors (NAR) found that the total value of homes purchased by foreign buyers from April 2018 to March 2019 fell 35%. Over the past year, real estate purchase by Chinese buyers declined 56%, likely due to the Chinese government’s control of capital outflow and simulative policies that encourage domestic investment.

Less competition from Chinese buyers means slowing home price appreciation, especially in California and New York areas where the Chinese investors have historically bought in. That’s good for buyers who have had to compete with all-cash offers over asking price for the past decade.

The Negatives

Higher Building Costs, Lower Supply

Many of us haven’t felt the inflation, slower growth, and recession caused by tariffs yet. In the past two years, we’ve seen 3% growth and 2% inflation. Most of the losses due to tariffs are offset by stronger dollar, devalued yuan, and cost absorption by middlemen.

While companies can initially absorb increased costs, prolonged tariffs will “eventually be passed onto consumers in the form of higher costs, ” Hale added. Tariffs on materials related to homebuilding, will eventually be passed through the cost of new construction and renovations. This could hit affordable homes the hardest, as thin margins on lower-priced homes will shrink further. It is bad news for home buyers - the already-low inventory challenge will exacerbate, accelerating prices beyond the added tariff expense, and worsening the affordability and availability problems in the market.

Dampened Consumer Confidence

Stock performance has psychological impact. Sharp and deep stock declines reduce confidence among all players in the economy. Even though most Americans have fairly small exposure to the stock market, its performance is widely covered in financial and mainstream news, and thus a prolonged negative coverage will make home buyers become more cautious about making such a significant and long-term financial commitment. For those who have significant exposure in stocks (mostly wealthy individuals), they’ll see their down payment funds decline, thus postponing the decision of home purchase.

It is no surprise that luxury homes became the biggest victims during uncertain times. The silver lining is, though, Redfin reported that luxury home sales price grew 1% YoY in Q2, bouncing back from a 1.7% drop in Q1 2019.

So far, confidence has remained high, but the situation is still developing.

The Takeaways

As long as China continues to devalue its currency, the tariffs may not be felt by consumers. Meanwhile, the Trump administration is pushing harder for a bigger rate cut from the Fed in September. There is now a strong chance it will happen.

U.S. housing is still on solid ground. Foreclosure starts are still low; homeowners are locked into low monthly payments. Especially for people that have housing needs and investment demand, a low rate environment brings people that were priced out previously back to the market. We may see an uptick in sales over the next year.

Should you wait for the next recession to buy a home? Economists have previously said that they do not foresee large home price drop as in the last financial crisis in 2008. Fundamentally, we are in a different era where lending standards have much improved due to regulation and speculative activities are muted. Without unsustainable bubbles in the housing market, I remain optimistic about home purchase. Waiting for something like 2008 to happen might leave potential buyers empty-handed, and disappointed.