Housing Investment in Today’s Uncertain Economic Environment
Donald Trump announced tariffs on pretty much everything yesterday. This was telegraphed well in advance, but nonetheless creates a huge amount of economic uncertainty. The stated goal - to restore US manufacturing - is something that, assuming the plan will work as planned, would take years or even decades to realize. Factories and supply chains aren’t built overnight, and a complete reshoring of US manufacturing would require a lot of skills that the US workforce no longer has.
Retaliatory tariffs from many countries are inevitable. This will combine to create a substantial economic shock. Recent stock market volatility suggests that the effect on companies is likely to be negative, bringing valuations down with them. At the same time, plans for massive tax cuts which are larger than any planned decreases in federal spending mean the current trends of massive budget deficits will continue (note that the 2024 US budget deficit was 6.4% of GDP). With such huge deficits, holding US government debt is risky as well, and still only has a real, inflation-adjusted yield of about 1.6%. Gold is a solid inflation hedge and has been the beneficiary of a flight to safety, but it yields nothing, produces no value, and is at all-time highs, having already increased 38% in the past year. Crypto is especially risky, and history has shown that if the market declines, crypto will decline faster and farther.
With such uncertainty, what asset class is positioned to provide reliable and profitable investments? Real estate. If trade wars drive prices up and slow economic growth as they are projected to, safe havens may be difficult to find, but housing may prove resilient.
A recent New York Times article estimated that the cost of building a home could increase by more than 18% due to a combination of material cost increases from tariffs and less immigrant labor (note that this analysis was done on April 1, before the broad tariff announcement mentioned in the first paragraph). What tariffs will be good at is driving up the cost of things: commodities, manufactured goods, etc. Housing is a thing. If the cost of new construction increases markedly, as it likely will, that will have the effect of decreasing the demand for new construction in favor of existing homes. Over a short period of time, this imbalance will vanish; existing housing will increase in price to match. This will only be mitigated by decreased demand for housing overall, which an increase in price alone will achieve to some extent, but housing demand will likely have to decrease substantially in order to even keep housing prices flat given the increases in the cost of new construction.
Can we say with any degree of certainty that housing prices will not decline due to economic disruption? Of course not. It would be highly unusual for there to be a recession without a decrease in housing prices, and it is possible that demand decreases enough that housing prices actually decrease in dollar terms. Investing is always about relative choices, however, and we believe that housing provides the best opportunity to protect and grow wealth in these uncertain economic times.
Stock performance is not well correlated with inflation. Bonds perform poorly in environments of increasing inflation, as investors demand higher returns on debt. Commodities are good inflation hedges but prices can be highly sensitive to demand. Housing prices act as a manufactured good in inflationary environments: prices will increase in response to increased costs of manufacture. While housing demand may decrease if the economy worsens, there is only so much it can decrease. People always need a place to live. Furthermore, housing has a revenue stream which surpasses that of almost any other asset class. You can achieve much higher cash on cash returns from owning a house than you would from stock dividends or bond yields.
We’ll be putting our money where our mouth is, and doubling down on housing in the months and years ahead.
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