Tariff Tumble: Mortgage Rates Dive Amid Trade Tensions!

Mortgage rates saw a decline to 6.64% on Tuesday following the U.S. government’s decision to impose new tariffs on imports from Canada, Mexico, and China. The latest development has heightened trade war tensions, fueling recession fears and sparking volatility in both the bond market and equity markets.

The decline in mortgage rates was primarily influenced by:

1. Investor flight from equities into safer bond investments.

2. Increased economic slowdown risks, bolstering expectations of potential Fed rate cuts later in the year.

3. Rising inflation expectations, which could later exert upward pressure on interest rates.

Despite rising economic concerns, the U.S. economy has not yet entered a housing recession, though some analysts indicate it may be moving toward a stagflationary direction—characterized by slower economic growth and persistent inflation. The Atlanta Fed’s GDPNow tracker recently issued a -2.8% estimate for Q1 GDP growth, but experts caution against taking this number at face value, suggesting that the overall economy may experience a moderate decline rather than a full-fledged recession.

The tariffs’ impact on U.S. building materials is another notable risk, with higher construction costs expected to affect home construction and home renovations. Given a significant portion of materials—such as lumber and steel—are imported, developers may see elevated expenses. This could further slow new home sales, particularly if higher costs are passed to buyers.

Fluctuations in mortgage rates have direct implications for the housing market. With persistently high home prices, declining rates could unlock home sales, encouraging prospective buyers who were previously sidelined due to affordability concerns. However, this positive trend could be offset by potential weakening in the job market, which would deter buyer confidence.

Looking ahead, markets anticipate one to two rate cuts from the Federal Reserve this year. However, if core inflation remains stubbornly above 3%, policymakers may delay easing monetary policy to prevent further inflationary pressures.

If the tariffs remain in effect longer than expected, they could dampen economic growth ahead of an anticipated Fed response. Conversely, if the trade war impacts begin affecting employment and productivity more directly, rate cuts may arrive sooner in an effort to stabilize the U.S. economy.

Ultimately, the evolving trade policy landscape and its consequences for supply chains, inflation, and consumer sentiment remain key factors in determining the trajectory of both interest rates and the housing market in the months ahead.