March 18, 2025 – Can Tariffs Lower Interest Rates?

Economic Commentary

Thus far, we have just heard about the fact that the implementation of tariffs will increase prices.  Another term for higher prices is the dreaded word inflation. And we all know what increased inflation brings to the table – higher interest rates.  Gulp.  The Federal Reserve is much less likely to lower interest rates in light of increased inflationary risks. This is one of the reasons we saw higher mortgage rates during the months of December and January.

But there is another half of the equation. We saw higher interest rates in December and January despite the fact that the Federal Reserve had lowered short-term rates late last year.  Why?  Because the markets anticipated tariffs and the Fed holding rates firm in the short run. Now that tariffs are here, the anticipation is over. Now we have reality. And the reality is that between government layoffs, tariffs and other factors, the economy is finally slowing down. Remember, we had several warnings of a coming recession and even stagflation during the past two years, warnings that did not come to fruition.

We are not saying that the economy is about to enter a recession.  But tariffs could bring a bit of stagflation to the table in the immediate future. A slower economy can cause long-term rates to fall even without Fed activity. We have already seen lower mortgage rates over the past six weeks or so.  This provides a further example of the markets moving independently or in anticipation of future Fed moves. Thus, regardless of what the Federal Reserve does today, tariffs may be contributing to lower interest rates. Which is counter-intuitive to the prevailing notion that they will raise prices. That is fine as long as the economy does not slow too much. A recession or long-term stagflation would not be welcome.

Weekly Interest Rate Overview

The Markets. The Freddie Mac rate survey was flat in the past week, despite positive inflation news. According to the survey, 30-year fixed rates increased slightly to 6.65% from 6.63% the week before. In addition, 15-year loans rose one tick to 5.80%. A year ago, 30-year fixed rates averaged 6.74%, slightly higher than today. “Despite volatility in the markets, the 30-year fixed-rate mortgage remained essentially flat from last week. Mortgage rates continue to be relatively low as compared to the last few months, and homebuyers have responded. Purchase applications are up 5% as compared to a year ago. The combination of modestly lower mortgage rates and improving inventory is a positive sign for homebuyers in this critical spring homebuying season.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Builders are trying various incentives to grow their market share as new construction commands the highest percentage of home sales in about 20 years.  Homebuilders believe they can help consumers who are struggling to afford record high home prices and elevated borrowing costs. New-home sales represented 14.5% of the real estate market in 2024—the highest percentage in about 20 years, realtor.com® Chief Economist Danielle Hale said.  New-home sales typically average about 10% to 12% of the market. “New-home sales are expected to outperform again in 2025, but competition will be growing from existing sellers,” Hale said. Here’s how the new-home market could open up opportunities for prospective buyers:

• Sales incentives: Nearly 60% of builders used sales incentives in January, according to the NAHB/Wells Fargo Housing Market Index. Sales incentives include funds toward closing costs, design credits and mortgage rate buy-downs. “
• Price reductions: Twenty-six percent of builders cut their prices in February, with the average price reduction being 5%, according to research from the National Association of Home Builders. The price gap between existing and new homes has been shrinking.
• Townhome growth: The market share for townhouses is at a multi-decade high, reaching 19% of single-family housing starts in the fourth quarter of 2024.
• Move-in-ready homes: Hale said there’s an increase in spec homes, or properties that are built before they have a buyer. In December 2024, 25% of new homes on the market were spec homes. Source: Realtor Magazine

Not only did the share of first-time buyers hit a record low last year, their median age is now up to 38 years old, according to the National Association of Realtors. To bring that into perspective, that means the typical first-time buyer has been out of high school for 20 years, but also just 24 years away from being able to collect social security, Lance Lambert of the ResiClub, a media and research firm, points out. Another way of looking at it: In 1991, the group’s median age was merely 21. At the same time, according to NAR’s latest Profile of Buyers and Sellers, the median age for repeat buyers was 61, helping to drive the median age of all buyers last year to an all-time high of 56. It’s not that first-timers don’t have the money. In 2024, their median household income of $97,000 a year, up $26,000 just two years ago. Furthermore, in 2024, they put down 9% of the purchase price, the most since 1997. Repeat buyers’ median earnings were $114,300 last year, less than $20,000 higher than first-timers, and 18% down payments. But high house prices, coupled with high mortgage rates – at least from their perspective – and a limited inventory of starter homes has made it difficult for rookies to take the leap.  “The U.S. housing market is split into two groups: first-time buyers struggling to enter the market and current homeowners buying with cash,” said NAR Deputy Chief Economist and Vice President of Research Jessica Lautz. “First-time buyers face high home prices, high mortgage interest rates and limited inventory, making them a decade older with significantly higher incomes than previous generations of buyers.” But Lambert of ResiClub says there’s more at work here contributing to what he calls the “vanishing first-time buyer.” He notes the fact that younger generations are delaying life events compared to previous generations — attending school longer, marrying later, buying homes later, and having children later — are adding to the trend.  Source: Lew Sichelman for National Mortgage Professional

Home renovators have made an honest living by fixing up distressed properties and putting them back on the market. But the latest study from Zillow indicates that home shoppers are passing on fixed up homes for properties that are more move-in ready.  Zillow’s analysis shows home shoppers are shelling out nearly 4% more than expected for a home that is already remodeled — about $13,194 on a typical U.S. home — to skip the dust, delays, and contractor nightmares. That’s the biggest sale price bump of all 359 listing keywords Zillow analyzed across two million homes in 2024. Plus, remodeled listings on Zillow get 26% more daily saves and are shared with a shopping partner 30% more often than homes that still need work. Translation: buyers aren’t just looking — they’re ready to make a move. It wasn’t always this way. Last year, a “remodeled” home barely nudged up the sale price, adding less than 1%. And before the pandemic, homes labeled as “fixer,” “TLC,” or “needs work,” actually moved faster than those without the buzzwords.  “Fixer-uppers can be appealing to a first-time buyer trying to get their foot in the door of homeownership because they offer a lower initial price of entry,” said Amanda Pendleton, Zillow’s home trends expert. “However, buyers who are already stretching their budget to afford a home in today’s market may not be willing or able to spend more on renovations or repairs.  Source: Zillow