Impact of Trade Deals on New Housing Starts and Remodeling
Avoiding a Recession Could Keep Mortgage Rates Elevated
With recent progress in the trade war between China and the U.S., including a 90-day period of lower tariffs, stocks and bond yields have risen. This raises the question: Is the de-escalation of the trade war beneficial for mortgage rates, which are closely related to hardwood manufacturing and distribution?
If the trade war calms down and a recession is avoided, mortgage rates could remain elevated, ranging between 6.75% and 7.25% in 2025. The 10-year Treasury yield has dropped significantly in recent years when the bond market anticipates a weakening economy, often in anticipation of Federal Reserve rate cuts. Despite current economic data not supporting such a decline, the market believed the economy would weaken.
Released this morning, the consumer-price index showed annual inflation easing slightly to 2.3% in the 12 months through April. That marked the slowest annual rate since early 2021 and undershot expectations that it would remain at 2.4%.
While the economy is not entirely out of the woods, finalizing more trade deals and establishing greater certainty with businesses is favorable for the U.S. economy. However, good news for the economy might not be great for housing, as mortgage rates can stay elevated in this environment. Housing tends to do better when a recession starts because rates tend to fall, and home sales have already declined due to higher mortgage rates.
Economists caution that this cooling effect may be short-lived. As companies begin passing higher import costs to consumers, prices for goods like used cars and electronics are expected to climb. Oxford Economics estimates that current tariff effects may temporarily lower annual inflation by about 0.3 percentage points. But by June or July, the same tariffs could begin driving inflation back up—potentially pushing core inflation to 4% by year’s end.
With inflation readings flattening and job growth possibly slowing, the Federal Reserve faces renewed pressure to consider interest rate cuts. However, Chair Jerome Powell has maintained a cautious stance, emphasizing that short-term improvements won’t sway long-term policy.
If the economy weakens further while more trade deals are made, the Federal Reserve may adopt a more dovish stance and cut rates more than the two forecasted for 2025. They might believe supply shortages and higher prices are temporary and will eventually decrease, leading them to focus on their dual mandate. If the labor market deteriorates, the Fed may shift to accommodative rates and actions, creating a more favorable environment for them. This could make reaching a 6% interest rate more achievable.
The housing market is sensitive to changes in mortgage rates. Elevated mortgage rates lead to higher borrowing costs, which may deter new housing starts and remodeling projects. Conversely, if mortgage rates decrease due to a weaker economy and more dovish Fed policies, borrowing costs would be lower, potentially stimulating new housing starts and remodeling activities. For hardwood sawmills, distributors, cabinet manufacturers and furniture manufacturers, a 6% 30-year fixed mortgage rate in the 3rd and 4th quarters would go a long way to improving the business outlook.
