President Trump hailed a significant decrease in mortgage rates this week, describing it as a “big, beautiful drop” during his address to Congress. According to data from Zillow provided to BW, the average rate on a 30-year fixed-rate mortgage declined by 14 basis points to 6.51% for the week ending Mar. 6. A basis point represents one one-hundredth of a percentage point.
It’s evident that mortgage rates have decreased. This marks the third consecutive week of lower average rates not only on 30-year mortgages but also on 15-year fixed and 5-year adjustable rate mortgages. However, the driving force behind the decline in mortgage rates may not bode well for the housing market.
One of the major headlines this week was the imposition of tariffs. Tariffs on Chinese goods were raised, and tariffs on products from Mexico and Canada were introduced, only to be rescinded shortly after. Mortgage rates dipped as the markets reacted to the uncertainty caused by these tariff changes. In the long term, tariffs could potentially increase the cost of homes beyond their current levels.
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Reasons behind the decrease in mortgage rates
The impact of policy changes on mortgage rates was evident as markets grappled with concerns over a potential
trade war
. Following the implementation of tariffs, Canada and China swiftly retaliated with their own measures. Leading U.S. retailers like Target and Walmart have already warned of possible price hikes on certain products.
The U.S. markets reacted negatively to this news, resulting in stock market declines as investors tried to assess the implications. With stocks being offloaded, many investors turned to
bonds
—a phenomenon known as a flight to safety. The rationale is that in times of stock market volatility, investors seek refuge in less risky assets like bonds.
Mortgage rates typically move in tandem with bonds, given that mortgages are bundled into similar investments. On the secondary market, home loans are packaged into mortgage-backed securities. Due to their long-term nature, MBS function similarly to bonds and attract the same investors.
A thriving bond market usually results in ample demand for MBS as well. This environment strongly supports lower mortgage interest rates, which was evident in the trends observed this week.
In the short term, the decrease in mortgage rates can be attributed to the downstream effects of Trump’s tariffs—although the volatile markets and potential
increase in grocery costs
may come at a high price for just a modest percentage drop. However, in the long run, the impact of tariffs on the housing market could be more profound.
Factors contributing to potential increases in home prices
The introduction of tariffs has raised concerns among home builders. Canada is a primary source of lumber for the United States, while Mexico supplies gypsum used in drywall. Estimates suggest that tariffs could substantially raise the cost of new construction homes.
Real estate data firm CoreLogic predicts a tariff-related price increase of $17,000 to $22,000. The National Association of Home Builders offers a more conservative estimate of $7,500 to $10,000. However, even a $1,000 rise in new home construction costs could potentially exclude around 116,000 households from the market.
While not everyone may be in the market for a
newly constructed home
, the escalation of prices in new homes could also drive up prices for existing homes. A shift in demand among home buyers could lead to increased competition, potentially resulting in higher home prices and offsetting any affordability gains from lower interest rates.