While interest rates may decline, inflation and rising costs could slow market growth
The Trump administration’s “Liberation Day” tariffs may cause a strain on an already challenged housing market, according to a senior economist with the Mortgage Bankers Association (MBA).
Trump announced elevated tariff rates on countries that have a trade surplus with the United States. He imposed a 10% baseline tax on imports from all countries, a 34% tax on imports from China, and a 20% tax from the European Union.
While the exact impacts of the tariffs announced on Wednesday afternoon in Washington are still unknown, MBA chief economist Mike Fratantoni (pictured right) believes that tariffs could put a squeeze on household budgets and stifle the new home market.
He said there are three areas of potential impact from the tariffs, including the cost of new construction, larger macroeconomic issues, and interest rates. He believes that the most predictable will be the effect on the construction market.
“One of the easiest to put a number on is the impact on the cost of new construction,” Fratantoni said. “We've been tracking tariffs on Canadian lumber and the impact there, and now there have been increased tariffs on steel, aluminum, and other inputs to construction.”
Fratantoni cited a recent report from the National Association of Home Builders, which projected an increase of $7,500 to $10,000 in new home builds due to the tariffs. He believes this will make new home affordability an even greater challenge in a market where it is already challenging.
“This is going to make it harder for the home buyer,” Fratantoni said. “And you would expect that a builder is going to pass those costs through to the buyer. So that impact is pretty clear.”
Retaliatory tariffs could slow the global economy
A second byproduct of reciprocal tariffs could be an overall slowing of the global economy, which will directly impact the housing market, Fratantoni said.
“You know from economic theory it's pretty clear what the direction is going to be between the impact of tariffs on imports to the US, and retaliatory tariffs from our trading partners,” Fratantoni said. “Global economic growth is going to slow, prices are going to increase, and so that will show up as, at least, a temporary increase in inflation.”
An increase in inflation, combined with price increases resulting from the new tariffs, could constrict the average household's budget. Fratantoni said it could also lead to other macroeconomic effects that impact the mortgage market, including potentially slower job growth, higher unemployment, and slower wage growth.
“On the inflation side, we've been living with that for the past couple of years,” Fratantoni said. “Everybody’s dealing with the challenges with the cost-of-living and prices of everything going up. The worries are that those prices are going to exceed wage growth and then make it, on an inflation-adjusted basis, tougher for a typical household to get by.”
Could lower rates help keep the market moving?
Fratantoni said that one positive aspect that could result from the new tariffs is lower interest rates. With the Federal Reserve noting that it will cut rates three times in 2025 instead of the originally projected twice, mortgage rates might continue a steady decline.
The Federal Reserve will now cut interest rates three times in 2025 with chances of a US recession rising to 35%, according to Goldman Sachs.https://t.co/XCTuoZrx7n
— Mortgage Professional America Magazine (@MPAMagazineUS) March 31, 2025
Ten-year Treasury rates, Fratantoni noted, have dropped since January, and mortgage rates have followed suit.
“Mortgage rates tend to move sort of one for one (with Treasury rates),” Fratantoni said. “Mortgage rates were above 7% earlier. Now we’re below 6.5%. So, we’re seeing a reaction.”
He noted that the decrease in rates is driving an increase in mortgage applications in both the refinance and purchase markets.
“Refinance volume has had a move up over the past month or so, and purchase application volume is up about 9% compared to last year at this time,” Fratantoni said. “For folks who are in the market looking to buy this year, this is kind of a nice combination of moves, with rates moving lower, home inventories moving higher, and home prices flattening out a bit. So, from a buyer’s perspective, there are some positives.”
While the Fed expects to cut rates three times, a rapid increase in inflation caused by tariffs could make them reconsider, according to Fratantoni.
“I think you're hearing different voices across the Federal Reserve System,” Fratantoni said. “Some are more concerned about the inflationary impact and worry that it won't be transitory but rather become sticky again. And then others are more concerned about the impact on growth and the job market.”
Fratantoni said the voices on the Federal Open Market Committee (FOMC) advocating for cuts to stimulate the economy have prevailed so far. However, increased inflation might result in a change of course.
“Depending on how the data comes in, if the inflation numbers start moving up, I think you'll see more voters on the FOMC being hesitant to cut aggressively, even in the face of a weaker job market,” Fratantoni said.
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