How Do Tariffs Impact the Economy and the Housing Market?
Every since the current presidential administration started discussing the use of tariffs to help correct trade imbalances, conversations about them have intensified, especially concerning their role in international trade negotiations. As mortgage professionals, you need to understand what tariffs are, how they function, and their potential effects on the housing market. Armed with this knowledge, mortgage loan officers and brokers can develop strategies to maintain healthy sales pipelines and continue closing loans effectively.
What Are Tariffs and How Do They Work?
Tariffs are in no small part taxes imposed by a government on imported goods or services. They can serve multiple purposes:
- Revenue Generation: Historically, tariffs have been a significant source of government income. The question is – at whose expense?
- Protecting Domestic Industries: By making imported goods more expensive, tariffs can encourage consumers to buy domestically produced products, thereby supporting local businesses. Doesn’t always work this way however.
- Political Leverage: Tariffs can be used as tools in trade negotiations to influence the policies or behaviors of other nations. Seems like considering current events, this is exactly what tariffs are being used for – threats to gain and capitalize on leverage.
How do Tariffs' Impact the Economy? What Mortgage Professionals Need to Know
The imposition of tariffs can have widespread economic effects:
- Increased Production Costs: Tariffs on raw materials or components can raise manufacturing expenses. (e.g. lumber, steel, gypsum, and aluminum)
- Higher Consumer Prices: Manufacturers often pass increased costs onto consumers, leading to inflationary pressures. Translation? If tariffs do ever materialize, lower income individuals are at the highest risk of adverse effects but don’t hesitate to look into the mirror and you’ll see an example of someone who will be paying the extra costs of goods and services. It isn’t just low income individuals who are adversely affected.
- Supply Chain Disruptions: Tariffs can cause companies to alter their supply chains, potentially leading to inefficiencies. In other words, companies may seek access to labor, resources, and capital in alternative markets if a tariff is implemented in the place they currently source these items. If the pandemic was any indication of just how fragile a supply chain can be, it may be prudent to go back and read this article.
- Retaliatory Measures: As we have witnessed over the past few days, when backed into a corner, other countries will impose their own tariffs in response, further complicating international trade dynamics. We are looking at you Canada and Mexico.
Tariffs' Impact on the Housing Market
Don’t be fooled by political rhetoric. The housing sector is particularly sensitive to tariff implementations:
- Rising Construction Costs: Tariffs on essential building materials such as softwood lumber and steel can increase construction expenses. For instance, the National Association of Home Builders (NAHB) has highlighted that tariffs on Canadian lumber have already added thousands of dollars to the cost of building a typical single-family home.
- Housing Affordability Challenges: Elevated construction costs can lead to higher home prices, making it more difficult for potential buyers to afford new homes. Considering we are already in a precarious housing state with lower than normal inventory levels and a challenging mortgage interest rate environment, the last thing the industry needs to swallow is an even more challenging affordability environment.
- Market Uncertainty: Fluctuating material costs due to tariff changes can cause builders to hesitate in starting new projects, potentially leading to housing shortages. Again, considering the fact that there is a housing inventory shortage, any additional new construction impediment is not good news for the industry.
Staying Ahead: How Mortgage Brokers Can Continue Closing Loans Despite Tariff Challenges
Given the volatility and political shuffling associated with tariffs, mortgage professionals can adopt several strategies to navigate the challenges, stay prepared, and understand their impact on the current and future housing market:
- Stay Informed: Regularly monitor policy changes related to tariffs and understand their potential implications on the housing market. Our go to resource on tariffs? The World Trade Organization website. Great resource on tariffs minus the ideological bull.
- Educate Clients: Inform potential homebuyers about how tariffs might affect home prices and mortgage rates now and in the future, helping them make informed decisions. Share online sites and resources that speak to tariffs and their implications with potential home buyers.
- Diversify Loan Products: Offer a range of mortgage products to cater to varying financial situations, especially if rising home prices are impacting affordability.
- Strengthen Relationships with Builders: Collaborate closely with builders to understand their challenges and timelines, ensuring that financing options align with current market conditions.
- Advocate for Clients: Work on behalf of clients to secure favorable loan terms, especially in a market where tariffs might be influencing interest rates and home prices.
Why Mortgage Professionals Must Understand Tariffs and Their Impact on the Housing Market
Tariffs play a significant role in shaping the broader economy and have direct implications for the housing market, which is why mortgage lenders need to know and understand how they work. By understanding these dynamics, mortgage loan officers and brokers can better serve their clients, adapt to changing market conditions, and continue to thrive amidst economic uncertainties.
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