Inside this Article:
Santa Cruz County in California is a lovely place to live, with nice neighborhoods, great schools, and a close-knit community. President-elect Donald Trump has some big plans for the economy, and the Federal Reserve is also making changes to how it manages interest rates. This might lead to changes in property values. If you're thinking about buying a home in California, investing, or just keeping an eye on the local market, it's important to understand how these national decisions will impact real estate in your area.
Trump's Aggressive Policies and Their Hidden Effects
President-elect Trump’s bold economic plans—like tax cuts, higher tariffs, more government spending, and deporting undocumented migrants—are all designed to spur growth. But these policies could also push inflation higher, making things even tougher for California's already struggling property market.
Tax Cuts
Cutting taxes puts more money in your pocket, whether an individual or a business. On the surface, that sounds great, but the reality is that when there’s more money floating around, people tend to spend more. When demand for commodities and services exceeds supply, inflation begins to grow. This can lead prices to rise across the board, from groceries to—possibly—houses for sale.
Increased Government Spending and Borrowing
The government will need to borrow more to pay for these tax cuts and tariffs, which could push the national debt even higher. This could result in higher interest rates, making mortgages more expensive. For homebuyers in California, and across the country, paying significantly more for a property down the line—especially if borrowing costs climb due to the growing government debt.
Tariffs and Inflation
Trump’s proposed tariffs—especially on imports from major world economies like China—could increase the price of goods from electronics to construction materials. Builders (sellers) will likely pass these increases on to consumers if the cost of building homes rises. California's housing market, which is already dealing with a shortage of homes, could see prices rise even more. This would make it even more challenging for people to buy Santa Cruz homes for sale, a market already known for its even more serious cases of limited inventory, and these effects do not exclude any other part of this country.
The Fed’s Role: Lowering Rates Amidst Economic Uncertainty
The Federal Reserve is also a key player in California's housing market. After raising interest rates sharply in recent years to fight inflation, the Fed has started cutting rates in 2024. This move is meant to help stabilize the economy, and for the most part, it’s working. But when you mix that with Trump’s policies, it could lead to some unexpected consequences as things move forward from where we are now.
Recent Trends
In late 2022, the Federal Reserve aggressively raised interest rates until 2023 to counteract rising inflation. By mid-2023, mortgage rates soared to 7.09%, the highest level in twenty years. Then, in September 2024, the Fed cut rates by 50 basis points to encourage borrowing because the economic indicators showed signs of slowing down. The Fed’s decision dropped the federal funds rate significantly, bringing it down to a range of 4.75% to 5%.
Jerome Powell, the Federal Reserve Chair, made it clear on Thursday, November 14th, 2024, that with the economy still growing, jobs looking strong, and inflation staying above the 2% target, there’s no rush to lower interest rates anytime soon. This likely means borrowing costs could be higher for you and your businesses. Powell also mentioned that inflation is on a "sustainable path to 2%," which means the Fed aims to adjust monetary policy gradually to a "neutral setting" that doesn’t try to slow down the economy.
However, there's still some uncertainty about what that "neutral" rate will be in today's economic climate and how quickly the Fed will move toward it. A big part of the equation is how the upcoming policies under the new Trump administration—things like higher tariffs and reduced immigration—might impact both economic growth and inflation. So, while the Fed’s approach will be gradual, the exact path they take could depend a lot on how these new policies play out.
Lower Interest Rates = More Borrowing
Although the Federal Reserve insists it is not in a hurry to decrease interest rates right now, it remains a possibility soon. If they eventually do cut interest rates, borrowing money will become less expensive, allowing you to afford a larger mortgage. This usually leads to an increase in demand for housing. Adding more buyers could push home prices even further in a market like Santa Cruz, CA, where there are already more buyers than properties. Bidding wars may break out as competition heats up, pushing prices even higher.
The Risk of Undoing Progress on Inflation
We have mentioned earlier that the Fed has been decreasing interest rates after years of attempting to control inflation. However, with Trump's growth-focused plans injecting more money into the economy, inflation risks spiraling out of control again. If inflation rises, home prices in California and elsewhere may climb even quicker, posing new hurdles for first-time buyers and locals seeking to find a home they can afford.
Conflicting Agendas
Trump is trying to get the economy moving, but the Fed wants to keep inflation under control, which could create a lot of instability. If the Fed lowers interest rates more while Trump’s actions push prices higher, the housing market in this country might undergo some serious changes. This might mean paying more for homes because of inflation while also facing the risk of higher mortgage rates if inflation gets worse.
What Does This Mean for Santa Cruz, CA's Housing Market?
In Santa Cruz, CA, the property market has become unstable. There are more buyers than available properties, and the development of new homes for sale has not been proceeding swiftly enough to address this issue. Furthermore, Trump's policies and the Federal Reserve's interest rate adjustments may do little to help. Let's look at the two primary scenarios for what can happen in Santa Cruz and the entire California housing market.
Scenario 1: Stability with Gradual Growth
If Trump’s tax cuts, tariffs, and spending plans blend well with the Fed’s policies and succeed in lowering interest rates without causing inflation to spike, we might have a stable housing market. In this case, inflation would be kept in check, interest rates would slowly go down, and home prices would increase steadily. It would feel like everything is running smoothly—no crazy ups and downs, just steady and manageable growth.
Lower rates would make borrowing cheaper, but without inflation running wild, prices wouldn’t spike dramatically. Builders might be encouraged to add supply, but the pace would still fall short of meeting demand. So, if this balance can be achieved, housing affordability will remain tough, but the market won’t explode. Prices will likely increase modestly over time.
Scenario 2: Trump and the Fed fuel a boom.
Let’s say Trump sticks with his aggressive agenda—tax cuts, tariffs, and more government spending—and the Fed keeps cutting rates to boost growth. In this case, the housing market could take off like a rocket. Lower interest rates would bring more homebuyers into the market, with many suddenly able to afford bigger loans. Trump’s pro-business policies might spark inflation, pushing up the cost of materials and homes while creating a buying frenzy as people rush to get in before prices rise even more. Builders just won’t be able to keep up with the demand, which will make the supply shortage even worse and push home prices even higher.
Moreover, with Trump’s tariff hikes on imports, even construction materials could become more expensive. Since the U.S. imports most of its building materials from countries like China, Germany, and South Korea, this could either make it harder to afford new construction or push those added costs onto homebuyers. In this scenario, housing prices could rise sharply, making affordability even worse for buyers who wait.
So, Should You Buy Now or Wait?
If you wait, your best-case scenario is that rates continue to drop, prices stabilize, and you get a slightly better deal in the future. Your worst-case scenario for waiting is that the market takes off, prices rise rapidly, and you may pay significantly more for the same property down the road.
But if you buy now, your best-case scenario is that you lock in a long-term rate before the market heats up and secure a property at today’s prices. If the market booms, you’ll be in a great position to benefit from rising home values. Now, your worst-case scenario, if you buy now, is that prices and rates drop slightly after you purchase, but the difference is unlikely to outweigh the risk of missing out entirely if prices soar.
The bottom line on housing is that whether Trump’s and the Fed’s policies align or collide, one thing remains clear: we’re unlikely to see housing affordability improve. Supply and demand alone will keep prices elevated, and any delay could mean missing out. So, the smart move is to act strategically now, locking in a long-term fixed-rate loan and targeting high-growth markets before competition and prices heat up even further.
Act Now!
The question isn’t if the housing market will remain challenging; it’s when you’ll decide to jump in and make your move. The opportunity is here—are you ready to take it? If so, let’s talk strategy.
How can you prepare for what’s coming? Here are three actionable steps that you can take right now to position yourself ahead of the curve:
- Secure financing promptly: With the Federal Reserve expected to adjust rates, now may be the best time to lock in favorable terms.
- Start your home search early: Explore properties in growing markets like Santa Cruz, California, and nearby areas where supply and demand are creating new opportunities.
- Work with an expert: Partner with a real estate agent who understands the local market and can provide insights into the shifting dynamics caused by national economic factors.
Now is the time to make sure you're prepared.
Paul Burrowes, CRS, CCEC, SFR, NHCP, LHC, REALTOR® Licensed REALTOR® with over 15 years of experience and expertise. Commits to being on time and transparent. Acts as your consultant to ensure you make the best decisions to fit your transaction at every step in the process. Negotiates towards a low-stress, win-win outcome. Handles all the details for you, ensuring the hundreds of steps in your real estate transaction go smoothly. Proudly serving Silicon Valley, Santa Cruz, Monterey, and Santa Clara Counties! | DRE# 01955563 | (831) 295-5130 | paul@burrowes.com |
Helpful Resources
- https://www.bbc.com/news/articles/cev90d7wkk0o
- https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html
- https://www.volza.com/p/building-construction-material/import/import-in-united-states/
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