Will Chinese tariffs “steel” the show?
Over the past several months, there has been extensive media coverage of the current trade tensions between the United States and China. While the idea of the world’s two most powerful economies butting heads with each other makes for an interesting headline, it’s important to understand what exactly has been happening and how it might affect the South Florida real estate market.
Domestic political pressures have resulted in economic disputes for the United States, not only with China, but with major trading partners like Mexico and Canada as well. Currently, tensions between the United States and China have culminated in our administration imposing tariffs on $250 billion of Chinese imports, including 25% on aluminum and 10% on steel. Politics aside, the increasing prices of raw materials, such as steel and aluminum, poses a problem for a variety of industries, including our sunny South Florida real estate market.
Implications of tariffs:
In commercial real estate, increased input costs for steel and aluminum are particularly important; increased construction costs mean lower profit margins for new projects and renovations. In fact, according to the Bureau of Labor Statistics, material prices for multifamily construction increased by 3.3% this year compared to January of 2018. More to the point, producer prices for steel went up 19% in that same time span.
Considering that in the South Florida market, the costs of homes have been outpacing the affordability of buyers, these tariffs worsen housing affordability (National Association of Home Builders). Furthermore, since 2011, the prices of single family home prices and condos in Miami-Dade County and Broward County have increased by 102% and 119%, respectively. The increase in construction prices has even led some experts to fear new construction projects won’t happen altogether in some areas of South Florida.
What’s going on:
Recognizing that price uncertainty will increase the level of risk that contractors face when bidding on projects, alongside a myriad of other factors, the Federal Reserve is already gearing up to drop interest rates to shelter the blow. Economists say it’s likely the Fed will move to cut rates this year, possibly as early as July. The lower interest rates are, the more access property owners and home buyers will have to cheaper money, thus reducing their monthly mortgage payments and providing a little more security during this time of economic uncertainty. Further, with lower interest rates existing homeowners may be able to refinance their homes and actually have lower monthly nuts to crack; allowing additional funds to be used to fuel economy by increasing discretionary spending.
From the trenches,