Recently the news has been overwhelming on the China trade war. Last week there was a trade meeting surrounded by fanfare, then there were the tweets from the president announcing more tariffs. The US markets plunged losing 2% in one day and bonds gained. What is going on? Why will your mortgage get cheaper? 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 many 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 as Chinese exports to the US are much larger than what China buys from the US.
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.
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 Yuan has fallen. This makes foreign goods less expensive (more buying power for each dollar). China has begun to “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 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
The good news: trade war making your mortgage cheaper
All the talk of the trade war has made the federal reserve very nervous. There is a fear that the trade war could be the “tipping point” to the next recession. As a result, the federal reserve has chosen to “hedge” and lower interest rates to keep the current expansion going a bit longer. Along with the lowering by the federal reserve, 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 since 2016 and subsequently mortgage rates to all time lows for the year. The swift decline in mortgage rates has helped soften the slowing real estate market as consumers purchasing power has increased.
The wild card: 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 confidence has held up well as spending has continued to increase. Unfortunately, the coast is not clear as consumers are a “lagging indicator” meaning that consumers will pull back after the economy starts to change. On the other hand, business spending/confidence is a leading indicator meaning that they will typically pull back earlier in the economic cycle. Business have started to get worried in this cycle as “CEO’s remain moderately pessimistic” according to the US Conference Board, a think tank that has been surveying member companies since 1916. Eventually the lack of business confidence will filter through the economy with a slowdown of hiring, purchases, etc….
What does all this mean for real estate
Real estate is running on borrowed time. Business confidence is showing signs of cracking with continual pessimistic views of the economy. Eventually this pessimism will flow through to the rest of the market causing consumers to pull back. Consumers are already telegraphing an upcoming change in confidence as real estate purchases and prices have started pulling back in many of the more expensive markets.
Summary
Although the headlines keep focusing on the trade war, the real impact is how all this news plays out through consumer and business confidence. Businesses are showing clear signs of pessimism which will ultimately translate into a pullback for consumers. The question is how much and when. Confidence or lack thereof as opposed to the trade war will drive the direction of real estate.
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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).