At first glance, it is easy to assume there is little connecting the cost of your home with the price of tea in China, but if you start to peel back the layers, you’ll begin to uncover the truth of the matter. Working to make American great again is the guiding principle of the current administration, and to this end, they have begun using an economic tool available to them, the tariff. This article is not to debate the politics of the decision or to argue for or against but instead to present one effect of the global trade policy on the American home buyer.
Interest rates are perhaps the most expensive item overlooked during the purchase of a home. For a $200,000 home at 5% interest over 30 years, the interest rate alone can effectively double the amount of money paid on the house. But what does this have to do with the tea in China?
Our country exists in a global economic multinational status where goods and services are exchanged with many different countries with relative freedom. This free exchange of products allows you to work a local job to buy washing machines made somewhere else because your labor is more valuable locally, and the washing machines are more valuable further away. It’s a bit more complicated, but you can get a doctorate in global economics, so I truncated some. By imposing a tariff, you increase the cost of the washing machines locally. If anyone sees a flaw in this system, please don’t point it out, that’s not the point of the article.
As a result of the increase in the cost of imported, or previously imported, goods, the local economy will go through a period of inflation while prices try to stabilize. Banks (including the fed) respond to inflation by raising interest rates, so the value of investments (which is what your home loan is to the person who loaned you the money) does not go down.
It was a long way, but we got there. Tariffs raise prices; rising prices trigger inflation; the response to inflation is an increase in interest rates. But, here is the hard part of accepting. Since most Americans own 30 years fixed interest rate loans than even after the inflation have subsided, and the tariff is gone, the effect of the increased interest rate will still be felt.
So here is where I will offer my advice. During these periods where the interest rates are looking ready to go up due to artificial forces that are going to play out for 5-10 years consider your options in Adjustable Interest Rate Loans (ARM). Your mortgage lender can cover the specifics of these loans, but if you are planning to be in your home for less than ten years or if you agree that this is a temporary problem and interest rates will go down then this could be a good option for you.