New Tariffs Mean Much More for Mortgage Rates Than You Think

Dave:
Last weekend, the Trump administration imposed the strictest tariffs we’ve seen in decades on Mexico, China, and Canada. And since then things have been changing a lot very rapidly. And as of today, Tuesday, February 4th when I’m recording this episode, we have a little bit of a break as tariffs with Canada and Mexico are on hold for the next month. But tariffs that were implemented against China remain in place and China has announced retaliatory tariffs against the us. There is a lot going on, and clearly this is a very fluid, quickly changing situation, but it really matters. It is important to the entire US economy, but it is also really important to real estate investors in particular. It could impact you in terms of course of your personal wallets, but it could also impact the costs you pay to build and maintain your own portfolio. And it could also impact the all important variable of the year, which is of course mortgage rates. So today I’m going to catch you up on what’s been happening, why it matters, and what to keep an eye out for as things continue to develop in the coming weeks, months, and perhaps even years.
Hey everyone, it’s Dave, and welcome to this episode of On The Market. We’re doing a very quick turnaround on this show because the situation with tariffs has been so rapidly changing that it’s hard to make commentary and then put it out onto the internet and have it still be true by the time it gets out there. Just the other day, I recorded a YouTube video that I had to can because everything had changed within the hour I was recording. The same exact thing happened on Instagram on TikTok, I was making those. So we’re going to do our best today. I am putting out all of the information that we have and my opinions and analysis of the situation as of the afternoon of Tuesday, February 4th, because even though tariffs are sort of this broader big economic type policy that has broad reaching implications, as you’ll hear over the course of this episode, there really are a lot of specific things about tariffs that will impact real estate investors, and I want to just give you as much of that information as I can.
Again, a lot of it’s going to change, but I think what we’ve learned in the last couple of weeks or in the last couple of days really, is that this situation is not going to resolve itself quickly. We’re going to be in this for at least several weeks, if not months, perhaps even years. And it is on all of us as investors to sort of learn what we can about tariffs, about what they are and what they mean, but also how the changes that will happen with them over the next couple of years will impact our real estate investing portfolios and our decisions. And today, hoping to sort of just give a basic lesson about what’s happened, I’m also going to give some examples about how tariffs actually work logistically, and then we’ll connect the dots about how each tariffs that might come into place in the future or the ones that China that are already in place and are actually active right now will impact your portfolio.
So that is what we’re going to get into. As I said, we’re going to start first by explaining what has actually happened. So let’s just go there Over the weekend, starting on February 1st, that was Saturday. The Trump administration basically made good on something that they’ve been saying that they’re going to do throughout the entire campaign and through Trump’s first couple of weeks in office, he’s been very clear that he intended to put tariffs on a lot of American trading partners. He came out this past weekend with tariffs against our three largest trading partners in the world. We’ve probably heard these sort of high level guidelines so far, but basically what happened was Mexico and Canada were hit with 25% tariffs. The only exception to that was Canadian oil, which has a 10% tariff on it. So it’s a little bit less, and we’ll talk about that later because the US imports a lot of oil from Canada, and that would hurt I think a lot to have 25% tariffs there.
So that was just at 10%. For China, it was 10% on all goods. And so that was the first thing that happened. Since then, if you’ve been paying attention to the news that both Canada and Mexico have each reached a delay for one month, they basically gave a couple of concessions. For example, Mexico is going to be sending 10,000 troops to the border to help mitigate the migration crisis that’s going on there. Canada gave a couple of concessions to sort of take the tariffs off the table for the next month so the three countries could engage in some dialogue and negotiations. So that’s what happened with Canada and Mexico, with China, the tariffs that Trump announced over the weekend still in place and China announced sort of a retaliatory tariff, which is basically saying if you’re going to tariff us 10%, we’re going to tariff you 10%.
So now anything that gets imported to China from the United States is going to experience a 10% tariff. So that’s where things stand, at least as of this recording. Let’s now just talk a little bit about why this is going on in the first place. The Trump administration has said that they have two primary policy objectives from these tariffs. The first and the one that he talked about a lot more over the weekend when he was announcing the tariffs is border security. He’s basically said that the tariffs that he put on Canada and Mexico, the plan is for them to be open-ended. There’s no end date to them. They are open-ended until the two border nations. So Canada and Mexico, again do something about unauthorized migration and drugs that are entering the United States, you’ve probably heard over the last couple of days, talks a lot about fentanyl coming across the borders as well.
And so Trump has said that that’s number one objective right now is to get Mexico and Canada to bolster their border security so that migration and drugs that are coming into the US slows down. That’s number one. The second policy that Trump has really hammered on is that he wants to increase domestic manufacturing, and he believes that by implementing tariffs on at least these three countries, if not more in the future, that will make American products more competitive in the United States that will bolster manufacturing and that in Trump’s view is a good thing. So those are the two policy objectives for these tariffs. Now, of course, pretty much every economic policy has trade-offs, and when you talk about tariffs, the thing that we need to acknowledge is that they have implications for both the exporter, which is what Trump is targeting. Canada, Mexico, China, and these situations are exporter. They are exporting goods to the United States for consumption here, but they also impact importers. So we have to sort of dig into terrorists what they mean and how they actually work. We are going to do that, but first we have to take a quick break.
We are back on the market talking about tariffs that were announced over the last weekend that have been continuously evolving, and today we’re trying to make sense of what tariffs are, what they mean for us as investors. When we left off, I was about to get into how tariffs actually work. So let’s pick it up there. Tariffs are essentially taxes that are paid by importers, and that’s a really critical distinction that everyone really needs to know. Even though Mexico is the one sending goods to the United States, the people who actually pay this tax, the people who pay the tariffs are Americans and American companies. This is super important. So essentially in any sort of trade relationship, there’s going to be an exporting company. Let’s just use cherry tomatoes as an example that may seem super obscure, but cherry tomatoes are actually a pretty big import from Mexico.
So let’s just use that as an example. So if there’s a farmer or a group of farmers in Mexico, they want to send their cherry tomatoes to the United States for consumption in the us, they will find a partner, an American company to sell those tomatoes to the company. In Mexico is the exporter. The company in the United States is the importer, and again, with tariffs, the importer is paying the cost. So the American company in this scenario is now going to be paying 25% more for these cherry tomatoes. Now you can see how this might create some questions or challenges in the United States. The importing company has some options of what they can do. In this scenario, they could absorb the cost of that 25% tariff and basically reduce their own profit margin. They could just pay the tariff themselves and make less profit. That’s probably unlikely.
What they more often do is pass the cost along to consumers. So basically the price of these cherry tomatoes is now when you go to buy them at the grocery store, they are going to be 25% more, or sometimes there is some combination of the two. It really depends on the individual. Good. There’s this very technical term called the elasticity of supply and demand in the market. Basically, it just means our consumers going to be willing to pay more for those cherry tomatoes if they’re willing to pay 25% more and the importer can just raise costs, they’re probably going to do that. If they can’t, they’ll probably do some combination of eating the cost in the margin themselves and raising costs as much as they can. So this reason because American importers and ultimately oftentimes American consumers wind up paying the cost of the tariffs, this is why most economists believe that tariffs have at least a one-time inflationary impact on prices.
Now, I think it’s really important to be clear here that most economists and the ones that I’ve talked to on this show or elsewhere believe that the inflationary impact of tariffs are one time, once the tariff goes into place. Right now, cherry tomatoes go up 25%, but it’s not something that is necessarily going to continue into the future where cherry tomatoes keep getting more and more and more expensive, at least not faster than the regular pace of inflation. We know inflation’s probably going to go up 3% this coming year, so maybe we get this 25% cost bump and then 3% every year after that. But it’s not like hopefully we’re going to see this seven or eight or 9% continuous inflation of certain products we saw back in 2021. That kind of inflation is more indicative of something called a wage price spiral. We won’t get into that today, but it’s just a different kind of thing.
Now, of course, the reason Trump is doing this is because he believes that it is worth this potential for one-time inflationary effects to achieve his long-term policy objectives. He believes that it’s worth inflation to get Canada and Mexico to the negotiating table about the border and perhaps spurring new domestic production because imports cost more. And we’ll talk about this more in a little bit, but I think sort of the thesis that Trump has seems to be that if he makes imports more expensive, if a, let’s just call it a smartphone from China becomes more expensive, that would provide companies an incentive to make smartphones in the United States and that could boost American production capacity. So I think it’s important to be clear that I think Trump himself has even mentioned that there could be pain as part of this terrorist. He just believes that it’s worth it.
Before we move on, I just want to sort of give people a sense of the projected inflation here. There’s a firm called Capital Economics, and they released a report that they said that they believe that PCE, which is basically the Fed’s preferred inflation measure. They believe because of the tariffs that were implemented this last week, and again, if they actually go into place, we don’t know right now, but based on what was announced, if those exact tariffs do go into place, they expect the PCE to go from 2.6% to 3.2%. So again, it’s not like we’re going back to 7% or 8% or 9%, that’s stuff that we saw in 20 21, 20 22, but it would be significant. This is important because it would predict a reversal of the downward inflationary trend, and we’ve all sort of endured a lot of pain in terms of interest rates to get that inflation under control.
And a lot of economists believe that these tariffs not necessarily will spiral out of control, but it would reverse the trend and send inflation back up at least temporarily. So that is the high level sort of situation as we know it today. But I also want to dig in a little bit onto the specifics of what would be impacted because that really matters, especially as investors. Yes, everyone’s saying 2.6 to 3.2%. No one wants that inflation. It’s terrible for everyone. But as investors and real estate people, we want to know if any of the goods services things that are going to impact our business are going to be included in these tariffs. So let’s just go country by country and I’ll tell you a little bit about what products, what things are going to be most impacted. And we’ll start with Canada. I think the really big one here is oil prices.
60, 60, 60% of American crude oil imports come from Canada, Mexico, another 10%. So 70% are coming from these countries. Now, this is probably the reason the Trump administration only put a 10% tariff on Canadian oil instead of 25%, but this is likely to cause oil prices, energy costs, at least in the short run to go up. And we actually saw this already. I’m recording this on Tuesday. We’ve seen data from Monday and Tuesday and oil futures have already gone up. Not crazy, it’s not like that much, but they did go up on this news because like I said, you’re importing oil from Canada, it’s going to cost the importer more. They’re going to pass that cost along to consumers. Now, again, we’re just talking about the short term right now because I know Trump has talked lot about increasing domestic production of oil, and that could offset this increased cost by putting more supply onto the market, but that hasn’t happened yet, and even if it does, it’s probably going to take years.
So we don’t know exactly what’s that’s going to look like. And so in the short run is what I’m saying is that crude oil is probably going to get at least a little bit more expensive. That’s the main one for Canada, but specifically for real estate investors. The other one that really matters here is lumber. Lumber is kind of like this benign sort of commodity up until the pandemic, when we saw lumber prices go crazy, lumber again, it’s a similar number, but about 66 0% of our imported lumber, softwood lumber comes from Canada as well. And so now that is subject to a 25% tariff, and that if it goes into place would put upward pressure, significant upward pressure on lumber prices, which if you’re a buy and hold investor, probably not going to impact you that much. But if you are doing new development or if you’re doing a lot of renovations that require framing, you’re building an A DU, those things could hit your bottom line.
Those two are the main things. When we talk about Canada, when we talk about Mexico, I actually don’t think too many things here are super entrenched into the real estate investing industry. Most of the things that will face tariffs that hit ordinary Americans are agricultural product. Mexico obviously has a very large agricultural export business. They export things, like I said, cherry tomatoes. We see beans come out of Mexico, avocados, a lot of beer comes out of Mexico, tequila comes out of Mexico, and so on. A lot more of these things. So these could impact you day to day when you’re going grocery shopping, but from a real estate centric perspective, it’s probably not going to be that impactful to you. One other thing I do want to mention before we start talking about China, just about these two North American countries is I kind of knew this, but I’ve been researching it over the last couple of days, and it is wild how integrated the auto industry is across all three of these countries.
And if you’re an investor and you need trucks and materials, car prices will be impacted, but I just think it’s kind of interesting as an American. So I’m going to go on a tangent here for a couple of minutes, but I did not know this, but 3.6 million cars per year are imported from combined Canada and Mexico with 2.5 million coming from Mexico. That’s a huge amount. It actually accounts for nearly one quarter of all cars sold in the United States in any year are imported from Canada and Mexico. The other thing is that almost every car company, and I’m not just talking about American car companies, but Asian car companies, European car companies, they assemble cars across all three countries, Canada, Mexico, United States, and actually half finished cars cross borders all the time. And so this is going to really throw a wrench into that process if these tariffs actually wind up going into place.
I dug into it and the numbers are pretty astounding. Stellantis, they make Jeep Chrysler a bunch of other cars, one of the big three in Detroit, 40% of their cars are imported from these countries. Gm it’s about a third, and Ford is about 25%. So again, if they don’t strike a deal and the tariffs go into place, we will probably see car costs go up, I would think pretty significantly. Hopefully that doesn’t happen, but we are a very car dependent country. People really love their cars and they’re already super expensive, and so if they go up more, I think this is going to really impact Americans. This is one I think you should keep an eye on, and again, I just want to reiterate similar to the situation with oil, Trump has stated his intention to get car manufacturing back to the us. That could happen, but it’s going to take time, right?
Factories take years to build, so in the short run, there could be some turmoil. We’ll just have to see what happens sort of more long term in these negotiations over the next couple of weeks and months. Last thing talking about specific goods is China. This is again, as of this recording, the only place where the tariffs are actually in place 10%. When we look, we import so many different things from China, but I think the big things are really sort of electronics types things. If you look at tablets, smartphones, video game consoles, toys, these kinds of things are going to be tariffed at 10%, and as of right now, it doesn’t look like China and the US are at least going to reach any sort of short-term agreement. Right now, it looks like those products are going to get 10% more expensive in the United States.
So that’s something you’re definitely going to probably notice in the next couple of weeks. It’s probably not going to be noticed as quickly as say a tariff on agricultural goods would have been noticed or oil prices, because those things trade a little bit faster. With goods coming from China, it’s going to take a little bit longer, but if the tariffs stay in place, you’ll notice them in the next couple of weeks or months. So keep an eye out for that. So those are the products I think are going to be most impacted by the existing and potential additional tariffs that go into place against Canada, Mexico, and China. We do have to take a quick break, but when we come back, I’ll talk about what you as investors should be paying attention to. Stick with us.
Hey, everyone. Welcome back to On the Market. It’s just Dave here today talking about tariffs. We’ve already talked a little bit about what tariffs are, how they worked, what specific products are likely to be impacted. Now, let’s talk about what you need to know as investors. I’ve already covered one topic, but I’ll just reiterate some products that might be more expensive, but I want to talk a little bit about mortgage rates. Again, for investors, I think the things that are really going to matter in terms of potential inflation are if the tariffs go back into place on Canada, I think those are the big ones, right? It’s going to be oil prices that impacts everything, right? If shipping is going to be more expensive, then the products that go on those trucks are probably going to be more expensive or go on. Those planes are going to be a little bit more expensive, so that, again, if it goes into place, those will impact prices, but lumber is probably going to be more expensive and potentially steel.
I don’t know. If you’re building residential, you’re probably not dealing with that much steel, but if you’re doing any sort of commercial, steel is likely to get more expensive as well. The other thing, of course, is appliances. A lot of people buy appliances and electronics from China, and those things do have a 10% tariff on them, so you can expect those to go up in the next couple of weeks. Now, if you’re a buy and hold investor, these things probably aren’t going to impact you in some massive, massive way. I can imagine that if you’re a short-term rental or a midterm rental investor, they could impact you if you’re furnishing any of your places with stuff from China, which is common stuff, right? If you’re buying sort of mid-level or cheaper level furniture or furnishings, a lot of that stuff comes from China and might get 10% more expensive based on these new tariffs.
So as investors, keep an eye out for the things that you buy a lot of or the high ticket items that you are buying in the next couple of months and see if they get more expensive. My guess is that anything coming from China will hopefully, because there is sort of this pause on the Canadian and Mexican tariffs, we won’t see anything go up and we’ll wait to see the results of the negotiations between the three countries. Now, the big thing that we do need to talk about here is mortgage rates. We can’t get away from any episode without talking about mortgage rates, even though tariffs seemingly on their face don’t have that much to do with mortgage rates, they really are actually one of the major forces driving rates right now. Now, just as a reminder, the Fed started cutting their federal funds rate back in September, and most people believed that we were going to see mortgage rates come down because of that, but around the same time, it sort of became more clear to a lot of people in the markets that Trump was more likely to win the election than he did win the election than he did get inaugurated, and through that entire period, he’s been talking a lot about tariffs.
Now, investors, generally speaking, if you talk about bond investors and that’s who matters. When we talk about mortgage rates, they don’t like the idea of tariffs. They don’t want tariffs to go in place. They might be supportive of Trump using tariffs as a negotiating tool, but they don’t want prices to go up because that leads to inflation, right? If tariffs go into place and there’s inflation that is not good for bond investors. We about it all the time on the show, but basically bond investors and the way that bond yields trade often has to do with what investors are more afraid of. Are they afraid of a recession? When they’re afraid of recession? People put their money into the safety of bonds that drives down yields and brings mortgage rates down with them. When investors, bond investors are instead more afraid of inflation, they usually don’t want bonds.
Bonds aren’t a great vehicle to hold wealth in when there is risk of inflation, and so they actually pull their money out of bonds that sends yields up, and that’s what sends mortgage rates up. People are less afraid of a recession than they were six months ago, but they’re increasingly fearful that tariffs are going to lead to inflation, and that’s pushing up bond yields, and that is pushing up mortgage rates. So there are a lot of things going on here, but if you wanted to point to one thing that has pushed and kept mortgage rates up over the last four to six months, I truly believe it’s this fear of tariffs. Now, you’ll notice that mortgage rates didn’t really move that much when the tariffs were announced, and that’s because Trump has been saying what he’s intending to do and bond markets, stock markets. They don’t wait for Trump to actually do what he’s going to say he’s going to do.
They listen to what he says in a press conference, and they price those things in. So tariffs have already been priced in a lot to bond yields and into mortgage rates, and so that’s the relatively good news. We didn’t see any spike in mortgage rates because of these things, and if tariffs stay in the realm of what Trump has already been talking about, they’ll probably not move that much because that’s already priced in. Now, of course, we don’t know which direction things go from here. I think there’s a very reasonable case that now that the three countries are talking, they’re going to be some negotiations and perhaps the overall scope of tariffs will come down, and that may actually help lead to some mortgage rate relief. The other thing that could happen though is an escalating trade war. We just saw that China, instead of coming to the table so far implemented retaliatory tariffs, and now we have 10% on US goods going to China.
Does Trump just stop there or does he escalate the tariffs against China in retaliation for that? We just don’t know. And so right now, what you need to know as investors is that the 25% tariffs to Mexico and Canada, 10% of China that’s been priced in, if the scope of tariffs goes up, mortgage rates are probably going to go up. If the scope of tariffs go down, mortgage rates could come down a little bit. So that’s, I think, what you need to be looking at over the next couple of months because no one knows exactly what’s going to happen. But as you’re watching this all unfold, as you read the news, as you listen to this podcast and we update you on what’s happening with these tariffs, remember that going on, tariffs make bond investors afraid of inflation, fear of inflation pushes up mortgage rates.
So one more time. Anytime there’s going to be news that make tariffs seem like they’re going to get bigger and batter, that’s probably going to push up mortgage rates anytime it seems like maybe we’ll have less tariffs than we originally thought, or a tariff gets eliminated, that is likely to help mortgage rates. Hopefully this all makes sense to you. Again, we don’t know where this is all going to come out, but I want you to sort of just understand how some of this works so you can interpret the news and information and data that’s going to be coming out about Terrace for the foreseeable future. That’s about all I got for you guys today. Hopefully, this episode at least gave you a primer on tariffs, why they’re happening, what they actually are, and how they could impact your real estate investing portfolio. If you all have any questions, feel free to hit me up on Instagram. I’m at the data deli. You can find me on BiggerPockets, or if you’re watching this on YouTube, you can just drop a comment in the comments below. Thank you all so much for listening. This has been on the market. We’ll see you next time.