Whether you're following the news closely or not, you've likely heard the term "tariff" lately. For those who don't already know, tariffs are fees levied on goods imported from specific designated countries. U.S. companies that import the affected goods pay these fees and then raise prices for American consumers to offset the costs.
So, how quickly do tariffs translate into price increases for your average American consumer? In many cases, the effect is almost immediate, with costs rising as soon as tariffs are imposed.
Fortunately, the tariffs levied on Canada and Mexico have been paused until March 4, 2025, with the hope that they will be lifted after this date. However, the tariff levied on China is still in place, and the future remains uncertain for all three countries with the potential for expansion to other countries and/or longer-term tariffs.
As Jim Tobin, President of the National Association of Home Builders, pointed out, "Are we going to be back in the same cycle a month from now? We're in a pause rather than either going forward with tariffs or doing away with them."
How will this affect home builders, homeowners, and buyers if the tariffs on all three countries go into effect?
Mexico, Canada, and China are key trade partners, supplying us with a significant amount of plumbing fixtures, glass, major appliances, and hardware. Over 30% of our softwood lumber is imported from Canada. And we rely on imports for 44% of our major appliances, 43% of our hardware, and 20% of our glass.
Increases in these costs could make these materials too expensive for some home builders to import, resulting in a reduced supply of new homes. If the houses are constructed, they will be sold for a higher price to offset the higher cost of building them. Both outcomes mean higher prices for buyers. And what if a home is being remodeled for sale, expanded upon or even renovated - it all adds up to one thing - increased costs.
To make matters worse, higher costs on non-housing items like gas, food, and clothes mean potential buyers spend more each month. This extra spending reduces the amount they can commit to a mortgage, preventing them from pursuing the dream of owning a home. And homeowners wishing to remodel or repair their homes may have to put these projects on hold as materials become either too expensive or not readily available.
The National Association of Home Builders has formally requested a tariff exemption on building materials, but we'll have to wait to see how that progresses.
Trump's tariffs could also rekindle the inflationary trend and convince the Fed to cancel or postpone the two interest rate cuts it had anticipated this year. That would risk keeping "interest rates at their current elevated level for a longer period in 2025. That will push up mortgage and loan borrowing rates … and reduce real growth," said Boston College economist Brian Bethune.
A bit of good non-tariff Los Angeles-specific news is that buyers could benefit from a disaster relief program that gives buyers 100% financing in federally declared disaster areas. Not only that, existing mortgages will not be counted towards your debt. That's huge news on both counts. It's been a long time since you could get 100% financing, and I remember it well because that's how we bought our first house in 2003, which we found before we'd had enough time to build up a down payment.
Hit reply if you or someone you know wants an introduction to the lender who can connect you with the 100% financed loan.
And if any of this news make you think about changing your real estate plans, give me a call and we will strategize how to get you where you want to be.
As we navigate our way through these rainy days, let's hope there are clearer skies ahead for the wonderful city we call home.
Love you, L.A.!
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