70% of lumber and 30% of drywall comes from Canada which could be subject to tariffs, what does this mean for the average build cost of a house? What does the chart above have to do with Tariffs? Will tariffs meaningfully impact real estate build costs and sales? Can tariffs actually work to decrease interest rates (opposite of what the media is saying)? Is the whole tariff scare just noise that will quickly pass over? What should you do today (or not do)?
What are in the most recentTariff proposals?
The answer to this question is a bit convoluted to say the least, one day there are tariffs, the next day there is an agreement, then there are retaliatory tariffs on America. Long and short, it feels like we are on a bit of a hamster wheel with tariffs, counter tariffs, tariff reductions, etc… Remember, what will actually be implemented or not is still very much up in the air.
If tariffs are still being negotiated why is the market going crazy
With tariffs or lack thereof definitely up in the air, then why are the markets going crazy in anticipation? Personally, I think that the whole tariff talk is a bit of a game of chicken to see how far the president can push before doing any real damage. With that said, the talk of tariffs alone is starting to have some lasting impacts. Countries throughout the world are reimagining their supply chains in order to protect their interests, especially in manufacturing. This will ultimately lead to higher costs.
The talk of Tariffs will lead to higher costs
When all the dust settles, I think the tariffs will either be non existent on many products or considerably less than what is being discussed today. Unfortunately this doesn’t matter as countries throughout the world are rattled by even the mention of tariffs which will create huge inefficiencies. Let’s take the example of a T-shirt. The US imports basically 90% of all garments from somewhere else because it is exponentially cheaper to manufacture in Bangladesh than in California. Under this new order, companies will be forced to move production to higher cost areas to protect against the threat of tariffs. This will ultimately lead to higher costs and huge inefficiencies. We are seeing this now with Europe working with local contractors to manufacture more helicopters for their military instead of relying on Boeing or other overseas suppliers.
Tariffs making consumers and businesses nervous
Furthermore, consumers and businesses are nervous over the unknown of tariffs. Whether these concerns are real or imagined doesn’t matter as uncertainty causes both businesses and consumers to act more conservatively with their spending. A good example of this is Delta came out with a surprise downside in earnings mentioning that demand is falling. This is not unique to just the airlines.
“The weakness in demand appears to have accelerated over the past couple of weeks, with a drop in close-in bookings reflecting possible concerns about the US economic outlook,” writes Jay Cushing, a senior bond analyst at credit research firm Gimme Credit. “We expect some of the underperformance in the quarter to be transitory (weather and accidents), but prolonged tariff uncertainty and signs of a slowing economy point to a more challenging backdrop.”
What do Tariffs mean for housing prices/costs
I’ve seen studies stating that build costs would rise by about 10k/house on average due to lumber and drywall cost increases. Although 10k/house sounds plausible, the real answer is we don’t actually know yet as the tariffs are still being negotiated. But, even if the costs increase by 10k this is not going to monumentally alter prices one way or another. Assuming the average home is 300k, the tariffs would add up to around 3% increase, this is assuming the customer eats all the costs. In reality, suppliers, builders, etc.. will each share a piece of the pie so the impact to the consumer will be nominal. Long and short I wouldn’t worry about huge jumps in prices for new construction as there are much bigger housing issues to focus on.
What happens to interest rates because of Tariffs
This is where things can get interesting. The conventional wisdom is that interest rates will increase due to price pressures from Tariffs. This is historically how tariffs have played out. But, there is an alternative theory that Tariffs will dent demand and in turn prices will not rise meaningfully. Long and short, tariffs will slow demand just enough so that inflation is kept under control. Under this scenario, the economy would slow due to a slowdown in demand which would lead to stable prices and ultimately the federal reserve cutting rates. I would not count out either scenario as the direction of the economy is absolutely up in the air right now. To summarize, the impact of tariffs on interest rates is not a given and could either increase or ironically decrease rates due to a slow down in demand. We will have to wait and see how this plays out.
What should you do now with the threat of tariffs
My advice with all the talk of tariffs is to get ready to take advantage of opportunities throughout the economy. Whenever there is huge volatility, it creates a market where people want/need to sell. This is where/when you will see opportunities as long as you are liquid and ready to take advantage of them. This is one of the key areas where hard money lenders like Fairview can assist as we can close in 7-10 days to assist when time is of the essence in Colorado, Georgia, and Florida on both residential and commercial investment properties.
Summary
My gut says all the talk on tariffs at the end of the day will be greatly reduced from the opening positions. Every country throughout the world has an incentive to trade in order for their economy to be efficient. I don’t think this motivation is changing overnight which means one way or another the leaders of various countries are going to figure things out. In the interim, look for continued volatility until businesses and consumers get greater certainty about the future.
This period of uncertainty could present buying opportunities if the market overreacts. Even though I think the tariff threats are really a game of chicken and a negotiating tactic, there is a chance that something unpredictable happens during this “transition period” that throws all of us for a loop. The best advice would be to stay liquid to ride through the unpredictability and buy when the time is right.
Finally you need to watch what happens to 10 year treasuries to see how the interest rate tug/pull will play out. It is not a given that rates will rise because of tariffs so ensure you are keeping an open mind and actually watching how the market reacts after the initial storm passes.
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
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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 Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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