How Tariffs Affect Real Estate

The economic headlines of the last two months have been screaming about tariffs, tariffs and more tariffs. 

The stock market goes down substantially when Trump increases or threatens to increase tariffs. It goes up when he decides to pause the tariff. When other countries threaten to raise tariffs against us, our stock market goes down. The stock market is a leading economic indicator and gives us an idea where the economy is heading.

 Tariffs, which are taxes imposed on imported goods and services, have far-reaching effects on various sectors of the economy, including real estate. While tariffs are primarily designed to protect domestic industries and generate government revenue, they can indirectly influence real estate prices through several mechanisms. 

The most direct way tariffs impact real estate prices is through construction costs. Materials used in construction, such as steel, aluminum and lumber, are often imported. When tariffs are imposed on these materials, their prices increase. Consequently, the cost of constructing buildings, homes and infrastructure also increases. Developers and builders, facing higher material costs, may pass these expenses onto buyers, leading to higher real estate prices.

 Tariffs can disrupt supply chains, causing delays and shortages of essential construction materials. These disruptions can slow down construction projects, increasing labor costs and extending timelines. We witnessed this during the pandemic when auto parts were not available, leading to long wait times for new cars and price increases. The cumulative effect of higher material and labor costs can significantly elevate the overall cost of real estate development, once again pushing up property prices.

 Tariffs can also affect real estate prices by influencing consumer spending and confidence. When tariffs lead to higher prices for goods and services, consumers may experience a decrease in disposable income. Higher costs for everyday items can reduce the amount of money people have available for other expenditures, including real estate. If buyers are spending more on imported goods due to tariffs, they may be less inclined to invest in property, leading to a potential decrease in demand for real estate.

 Additionally, tariffs can create economic uncertainty affecting consumer confidence. When tariffs are imposed, they can lead to trade wars and strained international relations, which can destabilize the economy. Economic uncertainty often makes consumers and investors more cautious, reducing their willingness to make significant financial commitments such as purchasing real estate. Lower consumer confidence can result in decreased demand for property, which may lead to stagnation or even a decline in real estate prices.

 The broader economic impact of tariffs can also influence real estate prices. Tariffs can lead to inflation, as the increased cost of imported goods and materials is passed on to consumers. Inflation erodes purchasing power, making it more difficult for individuals to afford real estate. Higher inflation rates can lead to higher interest rates as central banks attempt to control inflation. This is where U.S. President Donald Trump’s opinion differs from the Federal Reserve Chairman Jerome Powell on economics. Increased interest rates make borrowing more expensive, which can deter potential homebuyers and investors, reducing demand for real estate and potentially lowering property prices.

 Furthermore, tariffs can affect employment and wages. Industries reliant on imported materials may face higher production costs, leading to reduced profitability and potential job losses. If tariffs lead to significant job losses or wage stagnation, consumers may have less financial capacity to invest in real estate. Reduced employment and wages can decrease demand for property, exerting downward pressure on real estate prices.

 So, what can we expect moving forward? We are in the middle of our spring selling season, and I am seeing good activity in the single-family home market with prices holding well. Real estate is a lagging economic indicator, any effects will not manifest itself for another six months or so. So, we deal with the prices at hand and see what happens later in the year.

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email johnlee@isellsf.com. Find an archive of his columns at RichmondSunsetNews.com.