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LOS ANGELES, CA. How will the United States increased tariffs on an additional sixteen billion dollars of goods impact the real estate market? China has announced retaliatory tariffs and has even decided to increase tariffs on another two hundred billion dollars of Chinese goods. There is a weakening trend due to trade disruptions. The actual impact on the real estate markets will only become fully visible later this year. As of this writing of our research report, we do not yet know the full extent of the US-China trade tension. We are not yet able to estimate the rate of change on the markets. We do not even know yet whether the cost of real estate would be lower or higher in the United States. Now, rhetoric remains strong on both sides and is leading to a confrontational showdown. It is still unclear how far it might go, and de-escalation will probably only start when there are visible signs of economic, market and/or political pain. So far, we consider these trade tensions between the US and China as a significant risk to sustained coordinated growth in the real estate markets. We now see no real upside through the remainder of this year, and indeed, there is a risk that the conditions may continue to deteriorate Two key modest positive economic assumptions are: 1) trade with China will be resolved; and 2) the United States’ growth remains exceptional next year. Due to the current state of the United States economy and the solid economic predictions, we see no surprises from the Feds. They will continue to hike rates in line with growth, employment and expected inflation. Whether there will be further rate hikes in 2018 will depend on the external data. Should there be another acceleration of economic activity and higher wage growth, the Fed will probably respond with a tighter monetary policy stance. Since the 2010s, the United States economy has been expanding at an average rate of 2.2%. The following factor explains this growth. In the United States, monetary and fiscal policy started to support the economy immediately to mitigate the impact of the real estate and financial crisis on economic growth and employment in 2009. In spite of the Fed’s rate hikes, interest rates remain quite low and have been for several years. The Feds are expected to continue raising interest rates. That is why real estate investors are worried. Their fears are ingrained in the perception that rising interest rates will weaken property values. Nevertheless, historical data show that higher interest rates have not necessarily impaired total returns. While the prospects for residential rental income properties still may be pending, it is important to recognize that economic and financial markets are still concerned with market volatility. This may prove to be challenging since real estate cycles typically turn due to negative imbalances affecting demand and/or to supply drivers. Overbuilding, over-lending, over-buying are imbalances that have characterized past downturns—all appear unlikely under current conditions. ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation. To purchase a subscription to Market Cycles and to learn more about the Center for Real Estate Studies, please visit us at CALSTATECOMPANIES.COM
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