The fight against high inflation continues in Spring 2022, as worries of inflation becoming permanent continue to spook global markets.

One of the fighters most prepared to counter inflation, the Federal Reserve (the Fed), recently announced a bump in interest rates during their March 2022 meeting. Higher interest rates will increase the cost of borrowing for consumers — and particularly homebuyers — putting a damper on economic activity even as jobs are still recovering from the 2020 recession. Yet, the Fed sees obtaining a normal 2%-3% level of inflation as crucial to regaining a healthy level of employment.

Well above the Fed’s target, the average price of goods and services has increased 7.9% over the past 12 months, as of February 2022, according to the Bureau of Labor Statistics (BLS). This is the highest inflation rate seen in the U.S. since 1982.

While the Fed is using its go-to tool to fight inflation, there is a bigger culprit than the historically low interest rates of 2020-2021 behind today’s inflation: a major supply-versus-demand imbalance.

In a world where supply shortages are defining our everyday lives, the Trade War of 2018-2020 seems at least somewhat culpable in hindsight. Beginning with a tax on solar panels and washing machines, and moving on to steel and other building necessities, the trade war increased costs across the economy, including new housing, in a big way.

Meanwhile, U.S. exports have consistently declined on a net basis since 2014 (including during the Trade War years when the administration did everything in its power to reduce imports), according to the Federal Reserve Bank of St. Louis. Most recently, U.S. exports have plummeted since the pandemic began in 2020. At the same time, the Trade War has made it more costly to import goods from China, where much of the goods — and products necessary for homebuilding — that U.S. consumers purchase originate.

The end result has been fewer goods available, even in the face of rising demand.

However, the “Trump tariffs” are still in place, though the current administration has the power to lift these tariffs, according to a recent analysis of the tariffs’ impacts on inflation by economist Paul Krugman in the New York Times.

Krugman reports that the tariffs caused:

  • higher U.S. production costs by increasing the costs of components or parts produced overseas; and
  • fewer U.S. manufacturing jobs.

Housing is not immune to inflation and trade war impacts

For real estate professionals, it’s easy to see how rising interest rates are going to impact their bottom line: interest rates rise, reducing buyer purchasing power, putting downward pressure on home prices. However, it may require a few extra dots to connect the trade war with the instability in the housing market — but the line is there.

With tariffs producing higher prices for key building components — and reduced supply, which also increases prices — the cost to build a new home has surged. In fact, many building materials have more than doubled in price from 2019 to 2021. When asked how they are handling these building material shortages, two-thirds of builders responded that they are raising prices (though in reality, builders have needed to increase prices across the board).

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Supply chain disruptions threaten California’s housing market

The tariffs have been a particularly expensive problem for California builders and homebuyers, as beginning in 2020 all new California homes are required to include solar panels.

The tariffs on other building materials are a blow, as well, as Californians struggle with a crisis-level housing shortage and rapid home price increases.

Residential construction is already far below what is needed to meet demand. The result has been insufficient housing for a rising number of household formations. Shrinking inventory has caused insufficient multi-family units for renters and reduced transactions for real estate professionals, causing brokers to rely on a reduced number of high-priced home sales to make a living. Rising housing costs have also pushed homeownership out of reach for millions of renters unable to put away savings for a down payment due to the rising cost of rents.

California legislators have attempted to ease the housing shortage by smoothing the path for builders. This has included reducing permitting costs and times, loosening zoning and providing builder incentives. But local legislators do not have the ability to open the gates to economic trade and fix the building material shortages that characterize today’s homebuilding market.

Expect to see constraints continue in the housing market in 2022. Rising interest rates will dampen homebuyer power and enthusiasm and building material shortages will remain a problem, worsened by the ongoing trade restrictions.