Expect a ‘mortgage rate roller coaster’ following new tariffs 

This week has been marked by increased economic volatility — and the impacts could affect the real estate market just as the spring homebuying season gets underway.

President Donald Trump's larger-than-expected tariffs announced April 2 sent the stock market plunging on Thursday, leaving Americans uncertain and potentially hesitant about making big purchases like cars and homes. 

Good news and bad news for real estate

The huge boost in tariffs will set off a global trade war that will damage the economy in the short term, said Melissa Cohn, regional vice president of William Raveis Mortgage. For the real estate market, there will be some significant tradeoffs and opportunities, but it's unclear whether they will translate into more home sales.

"The good news for the real estate market is that mortgage rates are plummeting as well. The bad news for the real estate market is that significant wealth is being lost in the equities markets and people will be loath to cash in right now," Cohn said.

The 30-year fixed-rate mortgage was 6.63% early Thursday following the tariff announcement, according to Mortgage News Daily. That's down from 6.75% the day before as investors fleeing the stock market sought safety in the bond market.

It's unclear how long rates will continue to drop. If tariffs push up prices — and inflation — mortgage rates may climb back up, Cohn said. On the other hand, if the economy takes a turn for the worse, the Federal Reserve will cut interest rates.

"I expect to be on a mortgage rate roller coaster for the next few months," Cohn said.

A reprieve for builders

Two countries noticeably absent from the list of new tariff targets were Canada and Mexico, noted Realtor.com's Senior Economist Joel Berner. That could ease the stress on the home construction industry, which relies on Canada for lumber and Mexico for lime and gypsum, key components of drywall. 

"The ability of American homebuilders to produce affordable new inventory is directly linked to their ability to import key materials from our neighboring countries," Berner said.

While Canada and Mexico have been able to avoid the new tariff targets as well as the 10% baseline increase, other tariffs remain in place, including levies on autos, steel and aluminum.

However, there is still an expectation that the complexity of the tariffs will raise some construction costs, said Buddy Hughes, chairman at the National Association of Home Builders. Builders surveyed by the NAHB in March estimated that the average cost of a new home will increase by $9,200 because of previous announcements of tariffs on home appliances and certain raw materials.

"Builders have been doing their best to deliver smaller, more affordable inventory to the market to fill in the missing market for first time homebuyers, but additional tariffs, especially potential blanket tariffs against Canada and Mexico, could jeopardize their ability to continue to do so," Berner said.

Tariffs could force concessions — but cause inflation, unemployment to rise 

The Trump administration has shown a willingness to use tariffs as a negotiation tactic, so it's too soon to know which tariffs will stick, or for how long.

"One nuance is that President Trump's economics team appears to have calculated country-specific tariffs based on our trade deficit with a nation divided by our imports from that country — rather than based on actual barriers to trade," said Chen Zhao, economics team leader at Redfin, in a blog post. 

"This nonsensical methodology means that a country dropping its tariffs does not mechanically change the reciprocal 'discounted' tariff we are charging them. Presumably, the President is looking for concessions of a different nature or will simply change how the reciprocal rate is determined."

If the tariffs do remain in place, economists expect inflation to soar. Zhao said each percentage point increase in the tariff rate typically increases the rate of inflation by 0.1 percentage point, meaning core inflation could rise from 2.8% to 4.7%. The unemployment rate, currently at 4.1%, would be expected to hit 5%.

If inflation shoots up, Zhao said the Federal Reserve will have to decide whether this is a one-off inflationary impact or something that will linger and send the economy into a recession.

"No one knows the answer to that question," Zhao said.

Housing data mixed prior to tariff announcement

While overall mortgage applications have slowed 1.6% week-over-week, purchase applications were up 2% and increased 9% compared to a year ago, according to the Mortgage Bankers Association.

"Overall purchase activity has shown year-over-year growth for more than two months as the inventory of existing homes for sale continues to increase, a positive development for the housing market despite the uncertain near-term outlook," said Joel Kan, deputy chief economist for the MBA.

Pending sales remain sluggish, however, according to Redfin's weekly market report, falling 2.3% year-over-year as the typical U.S. homebuyer's monthly payment hit a new record for the second week in a row, averaging $2,802.

At the same time, new listings are up 12.7%.

"Some believe we're at the top of the market and they want to get top dollar for their house," Matt Ferris, a Redfin Premier agent in northern Virginia, said in the report. Ferris has also seen an uptick in selling activity in the D.C. area, citing concerns over federal job losses or a need to to move closer to the city because of new in-office policies.

Correction: An earlier version of this story stated that Canada and Mexico were subject to the 10% baseline tariff. They have been exempted from that new tariff but are still subject to earlier tariffs on autos, steel and aluminum.