Purchasing a home? When searching for the best mortgage rate, be prepared for a rocky journey as the U.S. economy struggles with the effects of President Donald Trump’s tariffs.
Trump said on Monday that he was halting the tariffs on Mexico for a month following a “friendly conversation” with Claudia Sheinbaum, the president of Mexico. Trump’s new 25% tariffs on goods imported from Canada and Mexico, along with an additional 10% tariff on Chinese goods, were scheduled to go into effect on Tuesday.
Trump also postponed the tariffs on Canada for at least 30 days, according to Canadian Prime Minister Justin Trudeau later in the day.
The turmoil of the trade war may have significant effects on the housing market regardless of whether or when tariffs are eventually imposed on imports from those nations.
The impact of Trump’s trade war on mortgage rates
The 30-year mortgage rate is one of the primary drivers of housing in the United States, influencing both building and sales.
Following Trump’s original tariff announcement, mortgage rates seemed to remain unchanged. As of Monday at noon, the 30-year fixed-rate mortgage’s average rate stayed at 7.05%, unchanged from the previous weekend, according to Mortgage News Daily.
In the foreseeable future, rates should stabilize somewhat. Due to the substantial volatility of the stock market on Monday morning, investors turned to the relative safety of the 10-year Treasury note BX:TMUBMUSD10Y, which kept its yield at about 4.5%.
The yield on the 10-year Treasury often swings up or down in lockstep with the 30-year mortgage rate, so the relative calmness of the 10-year could imply that mortgage rates stay mostly unchanged near the 7% mark, according to Cris deRitis, deputy chief economist at Moody’s Analytics, who spoke to MarketWatch.
However, things can change in the future. Financial markets may become concerned about inflation and the expansion of the US economy if Trump’s proposed taxes on imports are maintained for an extended length of time.
Then, according to deRitis, “investors will demand a higher rate on the 10-year [Treasury],” which would push up mortgage rates.
Indeed, Trump’s imposition of tariffs was already anticipated by the financial markets.
“This is nothing new; Trump has been discussing it since before the election,” Angel Oak Mortgage Solutions president Tom Hutchens told MarketWatch. “That’s why you’re not seeing a lot of volatility around it.”
What else might be coming down the line is probably the cause for concern.
According to Chen Zhao, head of economic analysis at real estate firm Redfin (RDFN), “whether mortgage rates rise now depends on how the administration’s implemented policies ultimately compare to what markets were expecting the president to do.”
According to her, the financial markets might be anticipating the outcome of the present trade dispute in order to determine whether additional tariffs are imminent.
Why mortgage rates are affected by inflation
One important metric to keep an eye on is consumer prices for imported items. As goods start to cost more, the tax on imports may increase inflation. In a letter, Boston College economics professor Brian Bethune stated that if the tariffs continue, they are likely to have a significant impact on consumer prices.
In order to curb consumer price rises and maintain inflation at the Fed’s targeted 2% level, the Fed may decide to take action by holding or even hiking interest rates from their current level.
Consequently, mortgage rates may rise.
But anticipate cautious Fed action. “While they are unlikely to hike rates, they will be more reluctant to continue their cutting cycle if broad-based tariffs are imposed, especially if the economy remains strong,” Zhao stated.
The trade war can potentially be a transient phenomena, according to certain theories. Veteran of the mortgage sector Hutchens stated that he thinks the tariffs were a negotiation strategy and will not remain in effect long enough to cause inflation.
A house crash is not likely to occur.
The timing of the tariffs couldn’t be worse for the housing market in the United States.
There is a severe shortage of affordable housing in the country, and many prospective homeowners are excluded from an increasingly pricey market. By raising the expenses for home builders, tariffs may cause housing prices to rise even further.
According to Moody’s deRitis, there is a 2.6 million home shortage in the United States. More housing has been destroyed by the wildfires in Los Angeles, and some homeowners who lost their houses are now straining the city’s rental market as they flee.
“Every bit of home loss is significant when you’re in this deficit,” deRitis stated.
In the end, purchasing a home will not become any simpler in the near future. Also, don’t anticipate a collapse in property prices.
“I don’t see a home-price crash unless we had an outright economic crash,” deRitis stated. “Foreclosures must be on the rise due to a rather significant slump. That kind of recession would have to be extremely long-lasting and unpleasant.
And he doesn’t currently anticipate such situation.
