Tariffs Slam Financial Markets: Mortgage Rates Won't Fall as Hard

The financial markets are in turmoil, and mortgage rates are feeling the impact. The Trump administration's recent tariff announcement has sent shockwaves through the economy, causing mortgage rates to plummet sharply. However, the relief may be short-lived as the long-term effects of tariffs could push mortgage rates higher.

The immediate reaction to the tariffs was a massive sell-off in the stock market, which sent investors fleeing to the bond market. This caused bond yields to drop, and mortgage rates, which loosely follow the yield on the 10-year U.S. Treasury, fell as a result. The average rate on the popular 30-year fixed loan plunged 12 basis points to 6.63%, according to Mortgage News Daily. This was the lowest level since October, providing a much-needed boost to the housing market as the busy spring season kicks into gear.

However, the relief may be short-lived. The tariffs could lead to prolonged inflation, which in turn could push mortgage rates higher. "Core inflation could climb to 3.5 to 4 percent by year's end—up from the current 2.8 percent—due to the new tariffs," according to Chen Zhao, Redfin's housing economist. This increase in inflation could prevent the Federal Reserve from cutting interest rates aggressively, which would otherwise ease the cost of borrowing. As a result, mortgage rates could remain higher for longer, making homebuying more challenging for many Americans.

The tariffs could also impact the housing market in other ways. For instance, tariffs on imported construction materials could increase the cost of building new homes. Roughly a third of lumber and most drywall and home appliances used in U.S. residential construction are imported, and all are subject to the new tariffs. Higher costs for these goods could be passed on to buyers in the form of more expensive new homes. This increase in construction costs could exacerbate the existing housing supply shortage, particularly at the lower end of the market, where affordability is already a significant concern.

The tariffs could also create economic uncertainty, which could affect consumer confidence and spending. This uncertainty could lead to a slowdown in the housing market, as potential buyers may delay their purchasing decisions due to concerns about future economic conditions. For example, "The high cost of buying coupled with growing economic concerns suggest a sluggish response from buyers in early spring," according to Danielle Hale, chief economist for Realtor.com. This sluggish response could lead to a decrease in demand for housing, which could potentially stabilize or even lower housing prices in the short term. However, in the long term, the combination of higher mortgage rates and increased construction costs could make housing less affordable for many Americans.

In conclusion, the tariffs could have a significant impact on the housing market. While the immediate effect may be a drop in mortgage rates, the long-term effects could push rates higher and make homeownership less affordable for many Americans. The tariffs could also create economic uncertainty, which could lead to a slowdown in the housing market. As a result, potential homebuyers should be cautious and consider the long-term effects of the tariffs before making a purchasing decision.