Tariffs and Rates: What Impact Are They Having?

By Rob Jafek, Principal with Boomerang Capital

There has been some volatility in the markets lately, and real estate is no exception. But the impacts are more subtle, and examination offers some fascinating and useful insights.

Let’s start with the big one: rates. Everyone looks at the 30-year mortgage rate, as well they should, since most homes are financed that way, and things there are undoubtedly interesting, and even hopeful. 

The 30-year fixed mortgage rate (dotted blue line in the chart below) is holding steady in the upper 6% range, which is still pretty high by historical standards. Meanwhile, the 10-year Treasury yield (solid blue line) has come down a bit. The orange line on the graph shows the spread between the two, essentially the margin banks use to price in risk and profit (and bank profits have been very high). Currently, that spread is around 238 basis points. That’s a full standard deviation above the historical average, which suggests there's room for some downward movement. If that spread narrows back to its long-term average, and there are many ways it could, mortgage rates could fall by just over 50 basis points, bringing us below the 6% threshold. And that’s a big deal.

Why does 6% matter so much? It turns out to be a psychological and financial tipping point for both buyers and sellers. The so-called “mortgage lock-in effect” has kept many would-be sellers on the sidelines because they are holding onto ultra-low interest rates. But 6% seems to be the (current) magic number where things start to move. Buyers begin to feel like homes are affordable again, and sellers feel a little more willing to trade up, even factoring in their existing low rates.

According to Bankrate, 52% of potential buyers say they need mortgage rates below 6% to seriously consider purchasing a home this year. On the flip side, 35% of homeowners say they’d consider selling if rates dropped below that same threshold. (For context, the only larger group—42%—said no interest rate would get them to sell.)

In speaking of volumes, Matt Vernon, head of consumer lending at Bank of America, summed it up well: “Below 6% we would see very meaningful pickup from a rate perspective.”

Tariffs are also topical, and while they’ve added some friction and uncertainty across the board, they play out a bit differently in our space. Specifically, they give a bit of an edge to rehabbed homes over new construction. Why? Simply put, rehabs generally require fewer new materials—fewer inputs—so they’re less exposed to those cost increases. Back in late 2021, the price gap between new builds and resales was over 25%. Today, it dropped below 15% as builders adjusted to shifting buyer preferences. But that gap is still getting squeezed, and input costs will likely keep the pressure on.

The volatility in other markets has led to price declines, in some cases quite significant. The impact on housing, so far, has been limited to decreased volumes, with little to no impact on prices. And price movement is expected to remain muted. Given that the footnotes are already pretty long, you can look that up yourself, or look at one of the more accurate predictors, the Housing Futures that trade on the CME. 

So, tariffs favor rehabs over new builds. The mortgage rate offers real signs of life for increasing volumes across the entire market, and mortgage spreads may be all it takes to make that difference without much of a heavy lift. And, regardless, home prices look to be stable for quite some time, so if you are looking for volatility, look somewhere other than real estate.