The Effect Of Tariffs And What The Future Holds

Effects of Tariffs and what the future holds

The effect of tariffs and what the future holds is not quite something that is readily discussed. Sure, we talk about what it is. Yes, we talk about the economic overall impact. But what does it all mean to you and I? And even better, how do we use this to our advantage?

What Are Tariffs?

Because this is widely shared in the news, I’m not going to spend a whole lot of time discussing it here. But, I do think it’s important for all of us to understand what they are.

Tariffs are basically a barrier to trade. It makes imported goods more expensive for the consumers and makes trade a bit more cumbersome.

Now, I’m not going to go in whether it’s a good call or bad call. Mostly for two reasons:

  1. No one asked me what I think about it and it’s irrelevant. It’s a waste of energy to debate the topic and as such, why do it!
  2. I don’t have all of the information as to why the call was made, so putting in my opinion on something I do not have a complete picture of is useless.

What I do want to talk about it is the effects on us and what I see future holds, financially speaking.

The Effects Of Tariffs

Because there are importation taxes added to the products we import, the cost of those goods goes up for us as consumers. So think of everything that you consume and use that is not made in your local country, let’s focus on USA and imagine all of that costing more.

If you lack imagination, do not worry. You can just look around and compare the prices from a few months ago to what they are now and where they will be in not-so-distant future.

For this particular post, I want to specifically focus on the housing market, especially as we head into the part of “what future holds”, as I see it.

When we talk real estate and cost of building, it is very easy to see that the prices of building supplied will go up. This is mostly because we import the goods, predominantly from China. And with tariffs on Chinese goods go in place, the price of those goods will have to go up.

Sure, the individuals and companies producing those goods could compete on price and lower it, to reduce the impact. However, every good produced has production cost. And going below the production cost is not a sound business practice. It is also a horrible business practice to compete on price (yet many businesses do it, so we shall see what happens exactly soon enough).

What The Future Holds

As the cost of raw building materials goes up, the cost of building will have to go up. Developers and builders need to recuperate their costs, which will result in buildings being built with a higher sticker price. You can see that, right?

For the builders to make profit (basically money after the sale, after paying their workers and covering the cost of goods) they will have to charge more, just to stay even on their earnings.

When we think of building supplies, I want you to think of everything that we import from China: cement, nails, lumber, plywood, glue, screws, windows, metal posts, roofing shingles… the list goes on and on. Nearly everything in construction is imported from China, mostly because lower costs.

Now, with cost of goods rising from China, we may see U.S. manufacturers get a boost in sales, which will be nice. But, the cost to you and I, the end consumers, will go up.

The Big Problem

If you have been listening to news or paying any attention whatsoever, you have likely noticed that there is a strong need for affordable housing. Meaning, there is a need for homes sold or rented on the market to be within the affordability range for average income earners.

Average income in United States is around $50,000, as of the date of this post. If we go with the simple formula of buying a home that is 3 times the earning, we are looking at a price point of $150,000 for a home. Or a rental of no more than $1,250 per month.

Even today, with prices of what was already built, there is nearly zero home builders who are selling homes at $150,000, especially in heavily populated and popular cities to live, like New York City, San Francisco, Seattle, etc. In those areas, you’d be lucky to get a place at $500,000.

With a salary of $50,000 per year, getting a home priced at $500,000 is simply not a possibility, right?

So folks in those cities are renting. But even finding a place to rent at $1,250 in those places in nearly impossible. Unless you choose to commute at least 1 hour or more to work.

Just recently, I checked rental prices in Boston. In desirable locations, I found studio apartments renting between $2,500 and $5,000!

That’s INSANE!!

Single person, earning average income could never afford that on their own. So they are forced to have roommates and at times people opt to move-in together in relationships, well before they should, only so they can afford a place to live. But I digress…

Effects Of Tariffs On Housing

So, what are the effects of tariffs and what the future holds when it comes to housing?

With prices make the stuff going up, it means that the end product will go up. How far and for how long, I can’t tell. No one can! Probably not indefinitely, but in short term it will have to.

This means that folks who need a place to live will have to get subsidies from the government (think Section 8). This program is already tapped out and people tend to wait years to get in the program. With more people needing this, there will be an even longer wait and more money will be needed.

Now, government can choose to ignore it, but for the fear of revolt (rightfully so) they will need to provide more money to these programs.

USA is already operating in deficit (meaning they spend more than they earn) and has been for decades. To create some additional funding for this, they will need to increase their revenue.

How does government increase revenue?

Taxes, of course!

There are a few ways to collect taxes:

  1. Sales Tax
  2. Property Tax
  3. Income Tax

Sales tax may go up, but not by much, since that will have a huge detriment on economy as a whole. Property tax may go up as well, which will make homes even less affordable, but this likely won’t go up by much, since valuation is so high and many of the wealthiest people in the world (think decision makers) own real estate.

What we are left with is income tax then!

A Few Different Incomes.

These are taxed differently and Robert Kiyosaki does a great job explaining how. But here they are in a nut shell:

  1. Earned Income (this is money you make from your job and is also called W2 Income)
  2. Portfolio Income (this is money you make from capital gains in things like stocks)
  3. Passive Income (this is money you make from rentals, royalties, etc.)

Because many individuals in the government and those lobbying and supporting the decision makers make majority of their money through passive and portfolio income, taxes on those incomes will likely stay stagnant (rarely people make decisions that are self-harmful). So there is a huge probability that earned income will be taxed at a higher level (it already is).

To ensure minimum risk of revolt, the taxes won’t go up (at least not by much) for lower level income. There will be a continued (it’s already happening) push to “tax the rich”.

Now, you may think that “rich” means million dollar earners or higher. But that’s not true. Rich are considered individuals who make about $165,000 per year or about $300,000 married couples.

While for those earning $50,000 per year, $165,000 may seem like a lot of money, please bear in mind that those folks can’t afford the “affordable $500,000 homes” either!

Solutions For High Income Earners

Typically, people earning this income ($165K+) are small business owners, consultants, doctors, lawyers, CPAs, etc. To combat the increase on their taxable income, they have a couple of different options (and we’ve already seen these):

  • Stop working after making particular amount of money per year (basically below the higher tax threshold)
  • Increase their rates (which they may have to do due to higher cost of living, supplies, rent, etc.)
  • Invest in portfolio and passive income sources

One of the best ways and strategies to combat this issue, especially if you fall in the “high income earner” category is to invest in real estate. Real estate ownership allows for legal reduction in taxable income and if you are an investor and making money, you may be able to have further reductions in taxable income and make more money!

Yup, all legally!

For the mid-range and below-average income earners, focus on increasing your income and do your best that your “new income” comes from passive or portfolio side of making money. Yes, this requires a bit of time and some education, but it’s so worth it. You can legally increase your income AND pay lower taxes.

Actionable Steps

So here are 5 simple and actionable steps to take to help ourselves:

  1. Start reading books on investing and business building strategies.
  2. Get a job that will not only pay you, but give you skills you need to build your business and investments.
  3. Attend seminars, webinars, workshops and talks on investing and business building topics whenever you can. Many of them are free or cost very little to attend.
  4. Take classes on investing and business building strategies from people WHO ARE DOING WHAT THEY TEACH (that all caps section is crucial for success).
  5. Implement what you learn! All of the information and knowledge are absolutely USELESS unless you IMPLEMENT. Learn – Do – Improve – Do – Learn some more – Do – Improve – Do – learn…

For those of you ready to take action and to learn, visit On Demand Products, sign up for FREE LIVE classes (and attend – only signing up won’t do a thing!), get your FREE books by Nev(click on topic you want, enter your email and VOILA free book coming your way!).

Note from author: While I did my best to paint the picture and share with you what I know, this is for information use ONLY and is NOT to serve as financial advice. Please do seek competent professional to help you structure your financials before you take any actions.