Tariffs and Housing: Exploring the Impact of Trade Policies on the U.S. Economy and Housing Market

As tariffs remain a hot topic in economic and political circles, their impact on various industries, including housing, is increasingly critical. In a recent episode of Optimal Insights, the team explored the complexities of tariffs, examining their historical context, present-day impacts, and potential future developments. The discussion sheds light on how tariffs could shape the housing market and the broader economic landscape.

Understanding Tariffs and Their Purpose

Tariffs are taxes on imported goods, designed to raise federal revenue or give American businesses a competitive edge. Tariffs are paid by U.S. companies and people importing foreign goods, rather than the countries subject to tariffs. According to PBS, for the fiscal year ending Sept. 30, 2024, the U.S. government is projected to collect $81.4 billion in tariffs and fees.

Historical Context of Tariffs

The debate over tariffs dates back to the birth of the United States, with early Americans viewing free trade as essential. Alexander Hamilton championed tariffs as a revenue source and a means to protect domestic industries. The Tariff Act of 1789 was the first substantive legislation passed by Congress. And through most of the 19th century, tariffs represented 90% of U.S. government revenue. Tariffs became a much less-significant revenue after the income tax was introduced in 1913, though they remained important for protecting American interests.

The Smoot-Hawley Tariff Act of 1930, passed after the 1929 stock market crash, marked a significant turning point for tariffs. According to the Council on Foreign Relations, the Act increased average tariffs by 20%, prompting a domino effect of retaliatory tariffs from other countries, which resulted in U.S. imports and exports with Europe falling by two-thirds. According to the Foundation for Economic Education, the Act also contributed to a significant decline in global trade and is widely believed to have worsened the Great Depression.

In 1934, Congress delegated much of its trade policy authority to the executive branch. According to History.com, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act into law, ushering in a new era of American trade policy, and promoting lower tariffs through negotiations with favorable trading partners. This principle has continued for decades, laying the groundwork for the General Agreement on Tariffs and Trade, the World Trade Organization and the North American Free Trade Agreement – all negotiated by U.S. presidents rather than Congress.

The Impact of Tariffs on the Housing Market

Understanding the historical context of tariffs helps us appreciate their current impact on the housing market. According to HousingWire, in 2018, tariffs on Canadian lumber added nearly $9,000 to the cost of building a single-family home. Industry groups like NAHB oppose these tariffs on the grounds that they could have a rippling effect on the cost of building new homes. Other homebuilding components, such as air conditioning systems and heat pumps, which are often manufactured overseas, could also see price hikes due to tariffs. When passed along to buyers, these higher costs could exacerbate existing affordability challenges in the housing market.

Geopolitical and Economic Implications

Beyond the housing market, tariffs have broader geopolitical and economic implications. The Optimal Insights team recently explored how tariffs serve as tools for foreign policy and their potential impact on inflation and interest rates. The discussion highlighted that while tariffs can protect domestic industries, they may also lead to reduced innovation and higher consumer prices.

Mortgage interest rates may go up in the coming months. They may go down. Arguments on both sides of this coin are persuasive. The only certainty we can provide is that Optimal Blue will be right here with you monitoring data as it emerges and providing expert analyses.

For more on the forecasted impact of tariffs, and their possible effect on mortgage interest rates moving forward, tune in to the “Tariff Tangle: Tracing the Impact on the U.S. Economy and Housing” episode of Optimal Insights.