The new administration in Washington, D.C., has announced trade tariffs, causing confusion and turmoil in various markets. Economists warn that tariffs will mean higher prices for a host of goods, including houses. How might tariffs affect the cost of a home?
What are tariffs, and who pays them?
Governments impose tariffs, which are taxes on imported goods, to make foreign products more expensive and to give domestic businesses a competitive advantage. The idea is to encourage US companies to buy products made in America; however, tariffs can significantly raise the costs of goods for American consumers. As an example, if the US imposes a tariff on steel imported from China, then buyers of Chinese steel in the United States will have to pay more for that steel. If auto makers use Chinese steel to manufacture cars, then the higher production costs are passed on to the customer, who ultimately pays the increased price.
How do tariffs affect the housing market?
Higher prices for materials such as lumber and metals (and even appliances) raise the cost of new construction. Prices may not just rise, but they may also fluctuate, creating instability:
- New home builders raise the price of homes due to rising costs for construction materials.
- Homeowners’ insurance costs rise because the potential insurance payout for a loss increases.
- Some potential buyers get priced out of the market by the increases.
- Opportunities arise for buying pre-owned homes that are not subject to rising materials costs. But as this demand rises, so do existing home prices.
- Discouraged buyers opt for the rental market. Increased rental demand raises lease rates.
- Sellers in a soft market and with high interest rates stay put and don’t try to sell.
- In turn, the softening of demand causes home prices to retrench. Home builders may offer incentives to attract buyers. Thus, conflicting factors cause prices to become unstable.
Financing may go through a similar cycle:
- The increase in the cost of materials and subsequent increase in new home prices could cause the Federal Reserve to hold the line on the high interest rates of recent years, or even raise them slightly, trying to dampen rising inflation.
- Higher rates dampen demand as the cost of homeownership rises, pricing many buyers out.
- As demand softens, the Fed decides to dial back rates, trying to “fine-tune” to prevent a recession. This is known as a “soft landing” for the economy, which is difficult to accomplish.
What should home buyers and sellers do?
In uncertain times, buyers and sellers alike need to simply stay vigilant. Prices rise and fall due to fluctuating market conditions. Therefore, it is essential to research current market trends, interest rates, and your local housing market’s performance.
Two practical steps to take are to have a real estate agent already on board, briefed on what the buyer’s or seller’s goals are, ready to move quickly on an opportunity. Second, buyers should have a mortgage preapproval already in hand to be able to act quickly at the right opportunity.
Related – Prequalified or Preapproved: What’s the Difference
