Recently the news has been overwhelming. Originally there was a deal with China then there wasn’t; now China is referring to the trade differences as a trade war. The US markets sold off and then they recovered then sold off again. What is going on? Why are we getting mixed signals from stocks and bonds? How will all this news impact real estate? Will tariffs end up tanking real estate and the economy?
What is really going on with the trade war
The United States and China are at a disagreement regarding various trade issues from intellectual property to currency manipulation to state sponsored companies to tech security. All these issues are real and have been brewing for the last 20 years. It is unlikely all or even the majority of these issues will be resolved anytime soon. As a result, President Trump has put in place tariffs to “encourage” China to negotiate in good faith. These tariffs will be approximately 25% on most goods coming from China to the US. If implemented the fear is that the tariffs will basically tank both the US and Chinese economies.
What will likely happen with the tariffs?
There is fear in the market that the tariffs will have a significant downward impact on the US economy as prices of many consumer products will increase by 25%. For example, if you were buying a flat screen TV that cost $100 that TV would now cost $125. This would quite a shock to the consumer and both economies, but the reality is radically different. If the tariffs are implemented, this is a big if, as both countries are playing a game of chicken, the impact will be considerably less.
China will take various steps to ensure the impact is muted.
For example, with the whole trade war, the dollar is naturally drifting higher while the Yen has fallen. This makes foreign goods less expensive (more buying power for each dollar). China will likely “nudge” their currency down to mitigate some of the exposure of the tariffs. China, through currency changes, could likely eliminate half the burden of the tariffs pretty easily. Furthermore China will provide support to various companies to help further the impact. Long and short, the true impact to the consumer will be 5-10% if that and many US companies could absorb some of the increase so the true impact will be even less
Bonds and stocks diverging and giving two different answers
Stocks: are pricing in that there will be some sort of resolution on the trade front where the tariffs will either not be fully implemented or that their impact will not be as great. The stock market is holding up relatively well and still up for the year even with all the negative news on the trade front. Could the market be wrong? Possibly, but I think some resolution will occur or the can will continue to get kicked down the road
Bonds: Bonds are pricing in something totally different than stocks. There has been a flight to quality, aka treasuries, as the bond market braces for a more “recessionary” environments. This has pushed 10 year yields to the lowest level in 2 years and subsequently mortgage rates to all time lows for the year.
Why are Bonds and Stocks acting differently
This is the million-dollar question. Is the stock market acting with “irrational exuberance” or is the bond market pricing in too much downside risk? Nobody knows this answer yet, but as time goes on eventually one will prevail. Personally, I think that both stocks and bonds are taking a bit of extreme paths with the real answer somewhere in between the two. Unfortunately there is one wild card that is nearly impossible to predict.
The wild card: Consumer and business confidence
The answer to why stocks and bonds are diverging and what will happen to the economy over the next 18 months lies in consumer and business confidence. Regardless of the actual outcome of the trade war or any of the other economic news, how the consumer and businesses perceive the future will be the key to the economy.
Currently consumer and business confidence has held up well, but the risk is that one or both will eventually pull back due to all the negative (or perceived negative) news. For example, will a business slow down on hiring or purchases because they are worried about the impacts of tariffs? If this occurs, then the economic dialog begins to change.
What does all this mean for real estate
The largest “driver” of the real estate market is consumer confidence. How you “feel” will be the leading indicator of what happens in the real estate market. How consumers and businesses react to the various negative news stories will be the leading indicator for real estate. Currently the stock market is holding up and rates are at historic lows which should keep real estate flat for the year. This is with the caveat that the consumer doesn’t overreact to the negative news. If there is a major negative headline (or series of headlines) that causes the stock market to have a sharp selloff expect consumer confidence to take a hit.
Summary
Although the headlines keep focusing on the trade war, the real impact is how all this news plays through consumer and business confidence. Consumers and businesses are currently nervous about the future with no clear direction either up or down. Unfortunately, with all the economic news coming out I think the consumer at some point will factor this to the downside. The question is how much and when. Confidence or lack thereof as opposed to the trade war will drive the direction of real estate.
Please post in the comments how you think your particular real estate market will do as a result of the trade conflict.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).