Impacts of Trade, Policy, and Inflation on Mortgage Rates and the Housing Industry
The economic aftershocks of the COVID-19 pandemic, which have shaped both domestic and global markets over recent years, are gradually subsiding. However, they are giving way to a new phase of policy-driven economic shifts, with trade, fiscal policy, and monetary policy likely to dominate the landscape. These changes have broad implications for economic growth, inflation, and particularly the mortgage market.
Trade policy, under the unilateral authority of the U.S. President, is poised to change substantially. Proposals such as President-elect Donald Trump’s 10 percent universal tariff and a 60 percent levy on Chinese imports could exacerbate stagflationary pressures by increasing consumer prices and slowing economic growth. Inflation forecasts have been revised upward, while real GDP growth projections for the near term have been tempered.
On the fiscal side, the Republican-controlled Congress is likely to extend the 2017 Tax Cuts and Jobs Act, preventing a reversion to higher pre-2017 tax rates but not necessarily delivering new economic stimulus. However, additional tax relief measures, if implemented, could provide a modest boost to GDP in 2026.
Globally, the imposition of tariffs could slow growth for economies heavily reliant on U.S. exports. Projections for global GDP have been adjusted to 2.5 percent for 2025, down from an anticipated 3 percent in 2024. In response, central banks, including the European Central Bank, the Bank of England, and the Bank of Canada, are expected to engage in monetary easing. Meanwhile, interest rate differentials may strengthen the U.S. dollar to its highest levels in over two decades.
Inflationary pressures stemming from tariffs and other economic dynamics could prompt the Federal Reserve to adopt a more hawkish stance. This could lead to rising long-term interest rates, including mortgage rates. While near-term monetary easing remains plausible, projections for a higher federal funds rate by 2025 suggest medium-term increases in borrowing costs.
A robust dollar could attract foreign investment in U.S. Treasuries, potentially lowering yields. However, this downward pressure on Treasury yields—and by extension, mortgage rates—might be offset by inflation-driven increases. Weaker GDP growth resulting from tariffs and related factors might reduce credit demand, mitigating upward pressure on mortgage rates. Nonetheless, inflation is expected to remain the dominant force driving rates higher.
Higher mortgage rates, combined with elevated home prices and limited inventory, are likely to exacerbate affordability challenges. This may suppress demand for home purchases and refinancing. The continued shift away from refinance volume may further compress margins, especially for institutions accustomed to high refinance rates.
Approval challenges should persist, particularly around insurance policies and GSE requirements. These could necessitate adjustments in underwriting and compliance practices. And a higher-rate environment will likely reduce the pool of qualified borrowers, intensifying competition among lenders. Innovation in product offerings and enhanced customer engagement strategies may be critical for differentiation.
Fortunately, new tax incentives or housing-related stimulus measures could boost specific market segments, presenting opportunities for mortgage originators to grow. Rising inflation, higher interest rates, and changing fiscal policies will demand strategic adaptability from industry participants. However, with careful navigation of these challenges, there is potential for lenders to capitalize on opportunities presented by policy adjustments and market needs. By staying attuned to regulatory changes and borrower dynamics, the mortgage industry can position itself to weather uncertainty and adapt in the shifting economic landscape.