How the Trade War With China is Making Your Mortgage Cheaper

Recently there has been an overwhelming amount of news regarding China. Last week, there was a trade meeting surrounded by fanfare, then there were the tweets from the president announcing more tariffs. The U.S. markets plunged 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 U.S. are much larger than what China buys from the U.S.

What Will Likely Happen With the Tariffs?

There is fear in the market that the tariffs will have a significant downward impact on the U.S. 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% to 10%, if that, and many U.S. 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 consumers 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.  Businesses have started to get worried in this cycle as “CEO’s remain moderately pessimistic” according to the US Conference Board, a think tank that surveys member companies.  Eventually, the lack of business confidence will filter through the economy with a slowdown of hiring, purchases and more.

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.