America could be facing months of stagflation—a combination of high inflation, high unemployment, and slow economic growth—in light of President Trump’s economic policies. That’s according to former Federal Reserve president Bill Dudley. This means that for real estate investors, things could be about to get very bumpy.
In a Bloomberg opinion piece, Dudley wrote that across-the-board tariffs could wreak devastating economic effects as demand for U.S. products drops and inflation rises to 5%.
Dudley wrote that even if Congress approves tax cuts, the economy will likely have its foot on the brakes “because there will be a considerable lag, and because low-to-moderate-income families, which tend to spend more of their income, will be hurt by tariffs more than helped by tax relief.”
With the financial markets in free fall, on April 9, President Trump decided to suspend tariffs for 90 days on 75 trading partners who have not retaliated—but left the effective 125% tariff on China in place. Given that it’s a 90-day pause, it’s possible that they will be resumed, so the scenarios laid out here are still possible, but news is becoming outdated as fast as ever.
“The Optimistic Scenario”
Stagflation occurs when inflation increases in a cooling economy, bringing with it a perfect storm of economic woes with no immediate solution and putting central banks in a no-win situation. Should they increase interest rates to lower inflation, they stifle economic growth, causing the real estate market to come to a grinding halt. And if they cut rates to stimulate investing, house prices will skyrocket, causing a greater affordability crisis.
“All told, stagflation is the optimistic scenario,” Dudley said. “More likely, the U.S. will end up in a full-blown recession, accompanied by higher inflation.”
Vaporizing Wealth
The staunchly conservative Wall Street Journal weighed in on the threat of stagflation in March before the tariff announcement. On April 6, the paper stated, “President Trump announced the highest tariffs in more than a century, vaporizing more than $6 trillion of wealth in two days.”
Fed chairman Jerome Powell said that the tariffs were “larger than expected,” and their immense scale made it especially important for the central bank to understand their economic effects before taking action. On msnbc.com, Jared Bernstein, former chair of the Council of Economic Advisers, wrote that stagflation “is a particular challenge for the Federal Reserve. To counteract slower growth, Fed officials can lower the benchmark interest rate they control. But to counteract inflationary pressures, they typically raise rates. Faced with stagflation, what’s a central banker to do?”
Powell and the President’s Collision Course
While Powell is wary of taking any knee-jerk reactions, President Trump is urging a rate cut, writing on Truth Social:
“This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always “late,” but he could now change his image, and quickly.”
“CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”
As Bloomberg suggests, it’s evident that Trump and the Fed could be on a “collision course” as the economic effects of the tariffs begin to bite.
Don’t Rely on Rate Cuts
For real estate investors, rate cuts seem like the panacea to solve all problems—even the increased construction costs brought on by tariffs and deportations. However, despite Trump’s urging, there’s no indication that is a path Powell is willing to take.
“After missing its target for many years, it would be a mistake for the Fed to dismiss the inflation fallout from tariffs as transitory and revert once again to stimulating the economy,” Rockefeller International Chair Ruchir Sharma wrote in the Financial Times.
“This notion that the Federal Reserve is going to ease four times this year, I see zero chance of that. I’m much more worried that we could have elevated inflation that’s going to bring rates up much higher than they are today,” BlackRock CEO Larry Fink said on April 7.
The Effect on Real Estate
Stagflation will affect real estate investors differently, depending on their specialty. Overall, however, it’s hard to envisage any silver linings.
Construction
The construction sector will be the first and most obvious sector to feel the brunt of the increased costs of materials. Expect an average-sized home to cost $9,200 or more to build, according to a recent survey of homebuilders.
“Lumber from Canada and gypsum from Mexico are important inputs to American homebuilding, and while it would not be a surprise to see the White House target these imports again in the near future, the immediate threat of the tariff announcement on American builders appears to be less severe than it could have been,” Realtor.com senior economist Joel Berner wrote.
House flippers and landlords looking to remodel their homes will certainly feel the effects of the tariffs and stagflation.
Landlords
Regardless of the state of the economy, people still need a place to live. If unemployment increases and the economy stumbles, which is what happens with stagflation, the housing required will increasingly need to be affordable.
That broaches another thorny issue: How much will affordable housing cost to build, and if HUD jobs are lost and programs cut—threatened with federal layoffs—how will people be able to afford to live there?
Real estate agents
A poor economy and job loss affect everyone. One of the immediate casualties will be home sales. Fewer transactions mean fewer deals for real estate agents and brokerages.
Mortgage brokers
Less deal flow, coupled with a bad economy and higher inflation and interest rates, means fewer loans, which means mortgage brokers will feel the pinch.
Final Thoughts
Is there an upside to the stagflation predicted by President Trump’s tariffs? Only if the tariffs work, and jobs and manufacturing exploded in the U.S.—meaning after a maze of negotiating with foreign countries, the U.S. comes out of pending trade wars with a robust economy.
Many of President Trump’s usually loyal Wall Street allies, like JPMorgan Chase’s CEO Jamie Dimon and Pershing Square’s Bill Ackman, seeing their wealth fall off a cliff, don’t think that scenario is likely. They are sounding alarm bells about stagflation, with Ackman warning of an “economic nuclear winter.” Even Elon Musk called Trump’s tariff advisor “truly a moron” after he misspoke about Tesla.
Interest rates, too, have been on a roller coaster, first dropping after the tariff rates were announced, then increasing, and then rising again as economic fears set in.
“Despite the modest monthly increase, contract signings remain well below normal historical levels,” said Lawrence Yun, NAR’s chief economist. “A meaningful decline in mortgage rates would help both demand and supply—demand by boosting affordability, and supply by lessening the power of the mortgage rate lock-in effect.”
We can only hope for lower rates, but in the current economy, that seems highly unlikely. What does seem more likely is a lot of behind-the-scenes negotiation with different countries to lower tariffs and restore some stability to the market. No one wants to upset Wall Street for too long—even the president.
