There is much hyperbole in the news surrounding the economic impact of a trade war between China and the US, but just how would it effect California real estate?
INTEREST RATES
John Mauldin, an investment advisor, suggests that US trade with China is so intertwined that less trade could result in higher interest rates causing house prices to fall.
Trade with China is simple economics:
- Americans want Chinese goods more than we want the dollars spent on them.
- Chinese want those dollars more than they want the goods.
Chinese bank accounts hold trillions of greenbacks. What do the Chinese do with those excess dollars?
Well, they invest many of them in US Treasury securities—to the point that China is our government’s largest foreign lender. The bigger danger is that China may simply buy fewer Treasury bonds. This is simple math. Chinese investors can’t buy our T-bonds unless they have excess dollars—and they won’t if the president succeeds in reducing the trade deficit. If China doesn’t buy our bonds, somebody else will… but probably at higher interest rates. Prices rise when an external force constrains supply. This will raise Washington’s interest costs and further enlarge the debt. And when Treasury rates rise, other long-term interest rates (like mortgage rates) rise too. That could make home purchases more expensive, reducing other consumer spending and maybe hurting the housing industry.
However, a recent study by First American Financial suggests that even if rates doubled prices would keep rising!
AGRICULTURE (FARMERS)
Jock O’Connell, Beacon Economics’s international trade adviser, comments on California’s agriculture industry, saying Golden State ag exports to China last year totaled $732 million, or about 5.4 percent of the worldwide total of $13.68 billion, “so the new tariffs are not calamitous for the state’s agricultural sector.”
GASOLINE PRICES
The Sacramento Bee writes the National gas price tracker GasBuddy.com reported that the average retail price of gas in California last week was temporarily stuck at around $3.38 a gallon. The U.S. average was similarly locked in at about $2.65. “As markets have seen concern rise of a possible trade war between the U.S. and China, oil prices have been hit hard, leading gas prices to dramatically slow their recent ascent,” said Patrick DeHaan, GasBuddy’s head of petroleum analysis, who added: “While the pause button may be hit for the time being on the spring surge, it is still likely we’ll see prices advance again soon.”
EXPORTS
The LA Times reports China currently is the No. 2 market for shipments by California businesses, trailing only Mexico. 55 percent of the nation’s $390 billion maritime trade with China passes through the ports of Los Angeles, Long Beach and Oakland. The high trade volume helps keep more than 30,000 workers employed at the Port of Los Angeles, where 6 of every 10 containers arrive from China.
According to Jock O’Connell, international trade adviser, Beacon Economics’ analysis of U.S. trade statistics released by the U.S. Census Bureau, noted that California export numbers for April won’t be known until the first week of June. Between now and then, he said he expects the impact of the tariff on state exports will most likely be anecdotal. He added that parties receiving California merchandise also will be wondering about the duration of tariff surcharges.
INVESTORS
Grace Wyler, Orange County Register writes that China is the region’s (Southern California) most important financial partner. “Chinese investors poured a record $16.4 billion into California last year. Nowhere would the disruption be felt more than in Southern California. Almost 1 million Chinese immigrants live in California, more than any other state in the country, including 265,000 in Los Angeles County, 53,000 in Orange County, 19,000 in San Bernardino County and 13,000 in Riverside County. Their presence has fueled a home buying spree, concentrated mainly in the suburban ethnic enclaves of the San Gabriel Valley and Orange County. In downtown Los Angeles, the cranes are signs of a boom in Chinese real estate investment that is poised to reshape the city’s skyline and market thousands of high-rise condos to wealthy buyers in Beijing and Shanghai”.
Still, most economists and business leaders agree that Southern California’s brand is likely to withstand any escalation of U.S.-China tensions at the national level, at least for now.
New Homes Could Get More Expensive Thanks to New Steel, Lumber Tariffs
LUMBER
Last year US placed a tariff on Canada Lumber. According to Realtor dot com, about a third of the softwood lumber used in new-home construction comes from Canada. And after devastating hurricanes in Houston and Florida and deadly wildfires in California, there is a big need for that lumber.
According to Randy Noel, chairman of the National Association of Home Builders (NAHB) and a home builder and real-estate developer from LaPlace, La.,.lumber tariffs added $6,000 to $10,000 to the cost of a median-priced home. By contrast, the NAHB estimated that the cost of an average multifamily unit would increase by just $478.
But the cost of new homes isn’t the only way tariffs have an effect on single-family housing. The Canadian lumber duty was also projected to reduce investment in single-family structures by $1.1 billion, according to the NAHB. If a similar reduction were to now occur because of these new tariffs, that could slow new home building. Inventory constraints could be further exacerbated and fuel even more competition for homes.
STEEL
The planned tariffs would tack on 25% to the cost of steel, used in home foundations, floors, and high-rise construction, and 10% for aluminum from foreign suppliers, effectively increasing its price. This will increase the cost of construction on residential and commercial projects.
According to Aaron Terrazas, senior economist at real-estate website Zillow, the tariffs on steel and aluminum likely will have an impact on new home prices if the cost of those materials increases in the U.S. But that effect will likely be more muted because new homes typically have more wood than metal, said Whereas buying lumber represents one-third of the cost of building a new home, steel and aluminum contribute to between 0.5% and 1% of a home’s cost.
Unlike with single-family homes, however, apartment and condo buildings require a significantly more steel and aluminum in their construction than they do lumber. “You’ll see more price pressure in the multifamily space,” Terrazas said. And those costs may get passed onto both buyers and renters.
According to data provider Statista, the construction industry (including commercial and for infrastructure) accounted for some 40% of all U.S. steel demand in 2017. As per housing, steel and aluminum make up approximately 1% of a home’s construction cost, according to the Zillow’s Terrazas. Apartment buildings and condos employ more steel for their support structure skeletons, to strengthen cement, for stairwells, emergency fire escapes and elevators. Thus, rental rates may also rise as these costs are passed on.
In Summary
There are direct and indirect impacts to real estate posed by tariffs. Interest rates, Agriculture, Gasoline & Exports, Lumber & Steel are all affected to a degree, which can result in a negative impact to real estate values.
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