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The 2024 election has come and gone, and for Donald Trump and his transition team the work creating a new administration continues. And the press follows every event. Lenders and their clients are primarily focused on regulatory and economic developments. As for economic policy… well, we saw evidence of the future of that in the last few days with the introduction of tariffs against Canada, Mexico, and (to some extent) China.
The expectations for lower tax rates and unwinding some/many of the regulations put on various industries during the Biden Administration may occur. Whether those will come to pass and their long-term effect on the economy will certainly impact mortgage rates, however Orion wants our broker clients to know that there is tremendous lag time between initiating policy, getting anything through the legislative process, implementing the policy and then the impact that any policy changes may have on the economy.
Tariffs are taxes imposed by a government on imported goods, designed to increase the cost of foreign products entering a country. By raising the price of these imported goods, tariffs aim to encourage consumers and businesses to purchase domestic products, thereby supporting local industries and protecting jobs.
While tariffs can generate revenue for the government, their broader economic effects are complex. On one hand, tariffs may help reduce trade imbalances by discouraging imports and promoting domestic production capacity. On the other hand, they often lead to higher prices for consumers, as businesses pass on the additional costs. This increase in prices can contribute to inflation, reducing consumers' purchasing power and potentially slowing economic growth.
Moreover, tariffs can trigger retaliatory measures from trading partners, escalating into trade wars that disrupt international trade and create uncertainty in the global market. Such conflicts can harm exporters, disrupt supply chains, and increase costs for businesses relying on imported products.
In summary, while tariffs are used as a tool to protect a country's economy and national security interests, they also carry risks that can affect economic growth, consumer prices, and international trade relations.
Tariffs can indirectly influence mortgage rates through their impact on the broader economy and inflation. When tariffs are imposed, they often lead to higher prices for imported goods, which can contribute to overall inflation. As inflation rises, lenders may increase mortgage interest rates to maintain their returns and offset the reduced purchasing power of future payments.
Higher mortgage rates can make borrowing more expensive, potentially slowing down the housing market as fewer buyers qualify for loans or choose to purchase homes. Conversely, if tariffs lead to economic uncertainty or slow economic growth, central banks like the Federal Reserve might keep interest rates lower for longer to support the economy, which can help keep mortgage rates down.
Therefore, the effect of tariffs on mortgage rates is complex and depends on how tariffs influence inflation, economic growth, and monetary policy decisions. Homebuyers and homeowners refinancing their mortgages should monitor tariff-related developments, as these can affect borrowing costs and housing affordability.
Lower mortgage rates have already made 2025 a more active year for borrowing compared to last year. Recently, the Mortgage Bankers Association (MBA) reported the highest number of home purchase loan applications since late January.
This isn’t a particularly strong homebuying market yet this spring, but it’s an improvement over last year, which itself was better than 2023. We’re moving in the right direction, thanks to slightly lower mortgage rates and a modest increase in home inventory, giving buyers more options to consider.
Tariffs can have a significant impact on inflation, either increasing or, in some cases, decreasing it, depending on various economic factors. When a government imposes tariffs on imported goods, it effectively raises the cost of those goods for domestic consumers and businesses. This increase in cost often leads to higher prices for imported products, which can then ripple through the economy, contributing to overall inflation.
Higher prices on imported goods mean that consumers may have to pay more for everyday items, from electronics to clothing to food products. Businesses that rely on imported raw materials or components may also face increased production costs, which they often pass on to consumers in the form of higher prices. This chain reaction can lead to a general rise in the price level, reducing consumers' purchasing power.
However, tariffs can sometimes decrease inflationary pressures in certain contexts. By encouraging consumers and businesses to purchase domestically produced goods instead of more expensive imports, tariffs may help stabilize prices if domestic supply can meet demand efficiently. Additionally, if tariffs successfully reduce trade deficits and strengthen domestic industries, they might contribute to long-term economic stability, which can moderate inflation over time.
Nevertheless, the overall effect of tariffs on inflation depends on factors such as the scope of the tariffs, the availability of domestic alternatives, and the response of trading partners, including potential retaliatory tariffs. Often, the immediate effect is an increase in inflation due to higher import costs, which can influence central banks' monetary policy decisions and affect interest rates, including mortgage rates.
In summary, while tariffs are intended to protect domestic industries and improve trade balances, they commonly lead to higher inflation in the short term by increasing the cost of imported goods and services.
While mortgage rates are expected to decline in the near term, the newly imposed tariffs may drive inflation higher, potentially increasing the cost of buying a home. The latest Consumer Price Index showed overall inflation at 2.8 percent in February, with the shelter category remaining notably elevated.
Tariffs are essentially taxes imposed on imported goods, which directly affect the prices consumers pay for a wide range of products and services. When a tariff is applied, the cost of bringing foreign goods into the country increases. Importers often pass these additional costs onto retailers and ultimately consumers, leading to higher prices at the checkout counter.
This price increase can be seen in everyday items such as electronics, clothing, food products, and raw materials used in manufacturing. For example, tariffs on Chinese imports or goods from Canada and Mexico can raise the cost of these products, making them more expensive for American consumers. Businesses that rely on imported components may also face higher production costs, which can further drive up the prices of finished goods.
Moreover, tariffs can disrupt supply chains and reduce the availability of certain imported goods, potentially leading to shortages and even higher prices. While tariffs aim to encourage consumers to buy domestically produced products, domestic alternatives may not always be available or competitively priced, which can limit consumer choices and put upward pressure on prices.
In summary, tariffs tend to increase the overall cost of goods and services, contributing to inflationary pressures in the economy. This can affect household budgets and business expenses alike, influencing consumer spending and economic growth.
Raw materials are expected to become more costly under the tariffs proposed by President Trump, particularly if these measures are fully implemented.
The White House has shown particular interest in lumber imports as it evaluates which goods enter the U.S. market. According to the National Association of Home Builders (NAHB), the U.S. depends on imports for roughly 30% of its domestic lumber demand.
Currently, lumber imports are exempt from tariffs, but this status may change. A recent Commerce Department report highlighted that Canada supplies about 80% of the U.S.'s softwood lumber imports. The report suggests that import taxes on Canadian lumber could more than double within the year.
Lumber is not the only material facing potential price hikes. Tariffs on goods from Mexico could increase the cost of stone tiles, while tariffs in Europe may drive up prices for granite and marble. Additionally, President Trump has proposed industry-specific tariffs on copper and has already imposed tariffs on steel and aluminum imports.
Tariffs imposed by one country can have significant ripple effects on other countries, especially those involved in international trade with the imposing nation. When a country raises tariffs on imports, it increases the cost of its trading partners' goods, which can reduce demand for those products. This often leads to decreased exports for the affected countries, potentially slowing their economic growth and harming industries reliant on foreign markets.
Furthermore, trading partners may retaliate by imposing their own tariffs, escalating into a trade war that disrupts global supply chains and increases costs for businesses and consumers worldwide. Such retaliatory measures can lead to reduced trade volumes, decreased production capacity, and heightened uncertainty in world trade.
Countries heavily dependent on exports, such as those exporting agricultural products, manufactured goods, or raw materials, may face significant economic challenges when tariffs are introduced by major markets. For example, tariffs on Chinese goods or imports from Canada and Mexico can impact these countries' economies by reducing access to the American market.
Additionally, tariffs can complicate diplomatic relations and trade policy negotiations between countries, affecting cooperation on broader issues such as national security and international agreements. The uncertainty caused by tariff threats or actual implementation can also affect investment decisions and fiscal planning in affected countries.
In summary, tariffs not only raise costs and disrupt trade for the imposing country but also create economic and political challenges for other nations, influencing the global economy and international relations.
In the long run, tariffs can influence mortgage rates primarily through their impact on inflation and economic growth. When tariffs increase the cost of imported goods, businesses often pass these costs onto consumers, which can lead to sustained inflationary pressures. Persistent inflation typically prompts central banks, such as the Federal Reserve, to raise interest rates to keep inflation in check. Higher interest rates across the economy generally translate into higher mortgage rates, making borrowing more expensive for homebuyers.
Moreover, if tariffs lead to prolonged trade tensions or trade wars, the resulting economic uncertainty can slow down growth and disrupt supply chains. While slower growth might initially keep mortgage rates lower due to reduced demand for credit, sustained inflation combined with economic instability can eventually push rates upward as lenders seek compensation for increased risk.
For example, consider the tariffs imposed on imports from China and North American neighbors. If these tariffs persist over several years, the cost of goods like building materials and appliances could steadily rise. As construction costs increase, home prices may also climb, leading to higher mortgage amounts. Simultaneously, if inflation rises due to these tariffs, the Federal Reserve may increase benchmark interest rates, causing mortgage rates to rise. This combination can make homeownership less affordable over time, affecting both new buyers and those looking to refinance.
In summary, while the short-term effects of tariffs on mortgage rates can be mixed, their long-term impact often results in higher borrowing costs driven by inflationary pressures and economic uncertainty.
The economic effects of the new tariffs remain uncertain, but experts warn that rough waters may lie ahead. A slowing market could dampen job growth, causing some potential buyers or sellers to hesitate.
For many, purchasing a home reflects confidence in their financial future and economic stability. This uncertainty may make some buyers feel less secure about making such a commitment.
However, where there is uncertainty, opportunities arise. Lower mortgage rates could enable refinancing for homeowners who bought in the last two years when rates hovered near 7 percent.
Additionally, an economic slowdown might increase housing supply in certain regions. The combination of lower rates, higher inventory, and softened demand could tilt the housing market in favor of buyers.
Rising yields typically signal a decreased demand for bonds, and the uncertainty caused by tariff threats and rapid policy shifts under President Trump is contributing to market volatility. Higher yields also mean increased borrowing costs for the government, which can strain the national budget.
Beyond tariffs, several factors have driven the 10-year Treasury yield upward:
These elements collectively lower bond demand and push yields higher. Since mortgage rates closely follow Treasury yields, they have also risen.
President Donald Trump's tariff strategy focuses on countries with significant trade surpluses with the United States, aiming to bring manufacturing jobs back home, increase government revenue, and potentially lower interest rates by slowing the economy. However, reshoring jobs is challenging without a sizable, skilled domestic workforce willing to accept lower wages. Additionally, tariffs risk raising consumer prices and provoking retaliatory measures from trade partners. To date, tariff threats have contributed to rising yields rather than lowering them, counteracting the objective of cheaper borrowing costs.
China, with its competitive labor costs, control over critical resources like rare earth elements and lithium, and heavy reliance on exports to the U.S., is unlikely to yield easily. A prolonged trade war would negatively impact both economies and the global market.
Many were surprised by rates shooting higher in the days after the election. Markets, and people, don't like uncertainty, and the stock and bond markets are trading off Mr. Trump's previously stated economic policy proposals. Investors feel the new administration will be more business friendly with tax cuts, deregulation, and higher defense spending. But bond prices have dropped, moving interest rates higher, because then President-elect Trump promised to impose tariffs and implement other actions which could increase the Federal deficit, and ultimately drive up inflation.
Recall that inflation is the rising prices of goods and services over time. Rising prices erode the purchasing power of a bond's fixed future interest payment. It is still expected that the Federal Reserve's Open Market Committee will leave short term rates alone for some months into the future. But the interest rate movement that has occurred since the election represents the market's belief that President-elect Trump's policies will result in inflation.
Also recall that a tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and policy that taxes foreign products to encourage or safeguard domestic industry. And whether it is lumber from Canada, or avocados from Mexico, if the average U.S. consumer is paying more for items, that is inflationary.
But keep things in perspective! The average interest rate on a 30-year loan over the past 38 years was approximately 7 percent, about where we are now. And Orion's AEs have some very good products to help blunt the impact of interest rates for any of your clients financing a home or refinancing one. Ask us!
Please complete the form found below so we can stay in touch.
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