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Investors, Brace Yourselves: Is More Inflation on the Horizon?
The Federal Reserve recently enacted a rate cut amid inflation rising to 2.6%. This second reduction in 2024, although smaller at just 0.25%, still conveyed optimism regarding inflation’s potential decline. However, with Donald Trump re-elected as President, this optimism may require reevaluation. Several economists suggest that anticipated rate cuts may face hurdles under the new administration, given concerns that its economic policies could drive inflation upward, potentially halting further reductions.
Could inflation see a resurgence under Trump’s leadership? How might his prominent economic proposals impact inflation, and what implications would this have for Federal Reserve policy under Jerome Powell?
The Tariff Issue
Much of the economic debate around Trump’s second term centers on his commitment to impose tariffs across all imports. Tariffs could reach 60% on Chinese imports, 25% on goods from Mexico, and at least 10% for other countries. Concerns from economists and business leaders suggest that such a policy would add to inflation. Nobel laureate Simon Johnson cautioned that Trump’s promises could trigger “significant inflationary pressures,” as increased import costs would likely be passed on to consumers. Yale’s Budget Lab estimates that consumer prices might rise by 1.4% to 5.1% before accounting for any product substitution.
However, the Economic Policy Institute (EPI) has noted some benefits of Trump’s first round of tariffs, such as growth in the U.S. steel and aluminum industries. But EPI also highlighted that without a clear strategic purpose, tariffs tend to burden consumers with higher prices, as they’re unable to switch to domestic alternatives that may not exist.
Modern global supply chains add complexity; in sectors like electronics, companies can’t easily shift production. Tariffs also risk reciprocal actions from trade partners, which could reduce expected revenues by 12% to 26%, according to Yale. The U.S. may need subsidies to aid industries affected by retaliatory tariffs, as seen in the agricultural sector during the 2018–2019 trade disputes, where subsidies nearly matched import duty revenue.
In short, tariffs may raise costs for consumers and reduce competition, leading to fewer choices at higher prices, fueling what is called “experienced inflation.”
The Energy Policy Angle
If tariffs are inflationary, could increased domestic oil and gas production counteract this? Trump’s promise to reduce household energy costs by 50% may help alleviate inflation. According to Travis Fisher of the Cato Institute, ramping up U.S. energy production could lower costs across many sectors, as energy is a significant input in production.
However, the U.S. remains integrated in global fossil fuel markets, making it challenging to influence prices domestically. Despite increased oil production under the Biden administration, energy costs still rose. Sanjay Patnaik of the Brookings Institution emphasized that oil prices are shaped by global dynamics, often outside the presidency’s control.
The Immigration Factor
Turning to immigration, mass deportation could impact housing. Some argue that freeing up housing units would ease market pressures, but construction industry leaders, like Jim Tobin from the National Association of Home Builders, warn that deportations could exacerbate labor shortages in construction, increasing housing costs. About one-third of construction workers in the U.S. are foreign-born, and this figure is even higher in states like Texas.
While immigration can contribute to higher housing prices, economists point to long-term underbuilding as the primary driver. The pandemic saw a sharp rise in home prices and rents, with limited correlation between immigration and housing affordability.
As for the idea that deportations would free up existing housing, it’s worth noting that undocumented immigrants often live in shared, modest rental spaces, which are not typically preferred by U.S. residents.
Regulatory Constraints on Housing
Trump’s ideas for reducing regulatory hurdles and repurposing federal land for housing may hold potential to ease housing costs. Regulatory expenses can add more than $90,000 to new home construction, and reducing these could benefit builders and buyers alike. Economist Ralph McLaughlin highlighted the impact of strict land use regulations on the U.S. housing market, suggesting that loosening such policies could promote affordability.
Final Considerations
Trump’s second term is poised to bring significant economic changes. How extensive these shifts will be remains uncertain and will likely unfold gradually. Key considerations include the Federal Reserve’s response to any inflationary trends and possible implications for mortgage rates, though a clear outlook is still premature.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Investors, Brace Yourselves: Is More Inflation on the Horizon?
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“