Mortgage Rates Fall EVEN Further as “Tariff Tuesday” Triggers Stock Sell-Off

Dave:
Tariff Tuesday, as we are calling it hit this week. And it has set off a chain reaction impacting almost all aspects of the economy. And there are some particular elements of the ripple effect that will hit real estate investors in particular. So today I’m going to bring everyone up to speed on what actually happened and how the ongoing reactions to new tariffs that are rippling through the economy could impact you and your investment portfolios. Hey everyone, it’s Steve and 2025 so far has been super packed with economic news and this week was no different. We had tariffs going into place, a big sell off in the stock market. We had a major recession indicator going off, and on the upside we had mortgage rates dropping even further. It’s a lot, and I know last week we did a bit of an econ update, but we got a ton of positive feedback on that show asking us for more of those types of updates.
So I’m going to do another update on what happened this week because as I said, there is a lot to take in, but we hear on the market, we got your back. We’ve been following all the news closely, we’ve been doing a lot of research, and in this episode we’re going to bring you the most UpToDate information that we have that you need to drive your investing, your business, and your personal spending decisions forward. In this episode, I’m going to just briefly recap on what tariffs are. We actually talked about tariffs in detail a couple of weeks ago and explained sort of the backstory. So if you want a refresher, you could check out on the market episode back from February 6th. We’ll also in this episode talk about what has actually happened this week, or at least as of this recording on the afternoon of March 5th and why that all matters.
We’ll talk about how tariffs are specifically impacting real estate investors, how they’re impacting all Americans, and what the economic ripple effects might be in both the short and the long term. And most importantly, of course, at least to many people listening, we’ll talk about how this is going to impact mortgage rates because it’s kind of confusing. It may drive them up, it might drive them down. I’ll give you my opinion on that. Let’s get into it. Alright, so first things first, quick recap on tariffs and what they are in the first place. Tariffs are essentially attacks and they are paid by importers In global trade, there are two sides of any equation. There are importers that’s in the country that receives the goods, and there are exporters and tariffs specifically are paid by importers. So when the Trump administration implements tariffs, that means American companies that are importing goods from other nations are faced with a new tax.
So for example, and this is a real example based on what happened yesterday, if you are an American company importing lumber from Canada to build homes in the United States, that lumber essentially now costs you 25% more. Or if for example, you are now wanting to import electronics, let’s say from China, those are going to cost 20% more. And because these American companies are paying more or paying this tax, most people agree that tariffs are inflationary because that company that’s importing these goods and facing higher fees are almost certainly going to pass at least some of those increased costs onto consumers which will drive up consumer prices. Now of course, there are two sides and not everyone agrees on whether or not tariffs are good. The Trump administration clearly believes that these are worthwhile either as a negotiating tool to help boost US manufacturing or as a new revenue source for the US where detractors say that those benefits won’t materialize.
Or even if some of them do materialize, they won’t be worth the cost of inflation that almost everyone agrees will come with the implementation of these tariffs. So that’s basically what tariffs are. But let’s shift gears and talk about what actually happened this last week because it has been very confusing and hard to follow. We’ve had tariffs go on, we’ve seen pauses, we’ve had tariffs come off. So basically what happened this past week is after a couple of threats and failed negotiations, the United States has imposed the following tariffs. There are 25% tariffs on goods coming from Mexico. There are 25% tariffs on goods coming from Canada and an additional 10% tariff on goods coming from China, which brings the total tariff up to 20%. Because if you remember a couple of weeks ago, the Trump administration had already implemented a 10% tariff against China. That was on Tuesday, yesterday, that was March 4th, it’s now the afternoon of March 5th.
We’re recording this as late as possible Before we could release this, we did see that there has been at least a one month pause in tariffs on automobiles, and we’ve also heard that there’s continuing negotiation. So these things are still very fluid and they could change. But for the purposes of this video, we’re going to talk about what we know today and what the implications of tariffs as they currently stand could be. So where we stand today is now we have large tariffs on the United States, three biggest trading partners. The three biggest trading partners that we have are Mexico, China, and Canada. Mexico is the biggest with 506 billion per year. China comes next at 439 billion, and Canada comes in third at 412. They’re by far the biggest. Those are all over 400 billion. The next closest Germany is 160 billion. So these are by far our three biggest trade partners.
Now, we’ve implemented these tariffs against our three biggest trade partners, but there have been what are called retaliatory tariffs as well, which means that the governments of Canada, Mexico, and China are implementing their own tariffs to potentially damage the export of American goods. Canada has already spawned with tariffs of about a hundred billion dollars on US imports. The government of Ontario said they were going to halt all US liquor imports. Mexico has indicated they would retaliate, but they’re not going to announce the specifics until this coming Sunday. And China has implemented 15% tariffs on American imports, which include a lot of agricultural products and stuff like chicken, wheat, corn, cotton, pork, beef, that kind of stuff. So like I said, we don’t know exactly where this goes from here, but it has the potential to escalate. The White House has said repeatedly that there is a retaliation clause added to the measures that they implemented, which basically means that if any country chooses to retaliate in any way, they reserve the right to increase the tariffs on Canada and Mexico and China.
Now on the other hand, there are still negotiations going on, so there could be a deal that is reached. Again, we just dunno, but we have to sort of operate under the assumption that these tariffs are going to be roughly around where they are today because as investors, we need to make decisions about our portfolios, about our spending, and we can’t just be guessing about the future. We should at least be thinking about how current implementation of tariffs impacts each and every one of us. So let’s talk about that. Let’s talk about the immediate impact to real estate investors. The biggest, most immediate obvious thing, at least to me, is the impact that these tariffs could have on construction. Now we all know things like lumber, oil, electronics are all important to construction and those are things that we largely import. We import by far the majority of our lumber imports from Canada.
We import a lot of oil from Canada, particularly in the Midwest, and the northeast could be seeing higher energy costs and a lot of electronics come from China. So it’s hard to say exactly how much these goods could go up, but we’ve seen just for example, we’ve seen lumber prices already before these tariffs went into place, lumber prices had already gone up 11% in just a single month. And so that could be very significant for the construction industry. And this comes during a time while there are already questions about the construction industry, we see high borrowing costs oversupply in the multifamily space, weakness in the commercial markets already hampering construction and single family, it’s down a little bit, but it’s largely been doing fine. But this could prevent growth, right? If builders are going to be forced to build in a riskier market with lower margins, they could build less and that could have long-term implications for the housing market and the price of houses.
The second thing to think about is how these tariffs are going to impact basically all Americans. A lot of groceries, for example, are imported from Mexico, avocado, beans, beer berries, all of them highly imported from Mexico. And we could see prices of those goods go up in grocery stores. Cars are a really big one. This is one that’s been on my mind. Automobile sales are a huge part of GDP in this country, and an enormous amount of cars are imported from Canada, from Mexico, something like between 25 and 50% of all vehicles by American manufacturers. These are companies like Ford, GM and Stellantis who makes Chrysler and Jeep. They import up to 40% of parts or even entire cars from other North American countries. So this could be really hurtful for any areas that have large areas of automobile manufacturing. I personally own properties in Michigan and it’s something that I’m frankly a bit worried about.
And as I said before, we know as of today that there has been at least a one month pause on those tariffs, but if they do come back, they could be painful. And I do think if these tariffs stay, that inflation is going to go up in the short term. And I’m not saying this is going to be some protracted inflationary period we saw in 2021 and 2022, but in the coming months, most people agree that tariffs have a one-time inflationary effect and we’ll see some further increases in the CPI. I’m not saying it’s going to be crazy, but it may go up 1%. But I think for just as Americans, this matters, right? It’s going to impact all of us in terms of our spending power. But for real estate investors, it could also impact tenant’s ability to pay or people’s willingness to form new household, which could negatively impact demand for rental properties. Now, we are still far away away from that. I’m not saying that you should be concerned about that right now, but these are just some things that could happen if tariffs stay as they are today. Those are some of the primary impacts, at least on real estate investors. But there are a lot of secondary impacts like what’s going on with the stock market and mortgage rates. We will get to those, but first we have to take a quick break. I’ll be right back.
Welcome back to on the market. We are talking about tariff Tuesday and all the ripple effects that’s having through basically the entire economy. Before the break, we talked about some of the direct impacts to construction costs and inflation, but I want to turn our conversation a little bit to some of the more secondary impacts on the economy, like what’s going on in the stock market and how this could all impact mortgage rates. Stock market is a little bit more easy to understand. So we’ll start there. We’ve seen the stock market really sell off pretty dramatically over the last month. As of yesterday. At one point the nasdaq, which is really tech heavy, had sold up over 10%, which is a correction territory. It’s since recovered a little bit, but we have basically seen most of the Trump trade, which is what people call the boom in the stock market following Trump’s election in November and December and January, all that has been reversed and we’re basically back to where we were in November in terms of stock market valuations.
And that of course has broad impacts for everyone who owns stock. But there are two sort of notable implications for the broader economy. First and foremost is on GDP or gross domestic product. If you’re unsure what that means, it’s basically just a total measure of the economy in the United States. Now, stock prices have a lot of impacts on GDP, but I was recently reading this article in the Wall Street Journal about how the top 10% of earners in the United States make up 50% of consumer spending. And I’ll extrapolate that out a little bit, but consumer spending makes up 70% of our economy here in the United States. Everyone talks about government spending, business spending consumers, we drive the American economy, 70% of it comes from what you and I and our neighbors spend each and every day. And so if you put those two things together, the top 10% of the United States earners make up 35% of our GDP.
And those top percent earners tend to be heavily invested in the stock market. And you see this over time that when the stock market declines, those high end earners spend less. And so we could see further pullback in GDP and in consumer spending, which could impact the entire economy. Now, it’s too early to know the exact implications of this, but I think this matters because just as of last week, there is a tool called the GDP Now tool. It’s put out by the Atlanta Fed and it is one of the most accurate predictors of GDP and it actually already turned negative, which is a recession red flag. It doesn’t necessarily mean we’re in a recession. It doesn’t mean we’re going to have two quarters of GDP loss in a row, but it is a worrisome indicator and that already happened before some of these stock market decline.
So I do think overall stock market declines do increase the risk of recession. So that is one thing to think about. But of course as real estate investors, the other thing we want to understand is the impact on mortgage rates. And this is finally some positive news for real estate investors because rates have fallen from about 7.25% in mid-January down to about 6.6%. So I did an update last week and they’re about 6.75. So they’ve come down even further as of this recording. Why is this happening? That part isn’t so good for the rest of the economy. It’s because there are just broadening economic concerns. And yeah, tariffs are definitely part of it. But there are other things that we talked about like weak consumer sentiment, we talked about that last week, labor market uncertainty, we talked about that last week as well. And what I just mentioned, this new GDP now estimate came out and this definitely spooked markets and investors as well, seeing that one of the most accurate predictors is now saying that the economy is going to contract in the first quarter of 2025.
Now that’s why this is happening. But the implications for mortgage rates are that when people sell out of the stock market, generally what a lot of them do, and when I say people quote unquote, I’m not talking about you and me, the majority of the money in the stock market are either really wealthy people or things like pension funds, like people who are moving billions or trillions of dollars. And when a pension fund or a hedge fund, for example, sells part of their stock portfolio, a lot of times what they do is they move that money to the bond market because bonds are generally seen as safe where stocks are generally seen as risk assets. And when a lot of people all at once move their money into an asset like bonds, that’s another way of just saying there’s more demand for bonds. And when demand for bonds increases, that drives up the price of bonds, people are willing to pay more and more for a limited amount of bonds and that pushes down yields.
Basically, the government doesn’t have to pay as much because more people want them, right? And we know if you listen to this show that when yields go down like they have, that takes mortgage rates down with them. And so this economic softness has really led to lower mortgage rates. And so we have ourselves quite a bit of a situation here, right? On one hand, tariffs are generally seen as inflationary and therefore they would support higher yields and mortgage rates, which is not good for real estate investors. But on the other hand, the markets are interpreting tariffs as negative news and they’re having corresponding recession fears that are actually driving down rates. And so we’re in this situation where any further poor economic news could bring down rates even further, which is not good for the average American, but could potentially be good for the real estate industry.
And where we go from here is deeply uncertain. If I had to guess today, I think the economy is generally looking soft. I’m not panicking. I don’t think you should be in panic mode, but we’re seeing more and more soft economic data at the same time, I think we’ll probably see inflation in the short term from tariffs should they stay in place. Of course, if all the tariffs are canceled tomorrow, I’ll probably change my opinion about that. But because of these two beliefs that I have that the economy is sort of softening, but I think there will be short-term inflation, I don’t think we’ll see rates come down that much more in the next few months. But I also don’t think they’re going to shoot back up above 7%. I think they’ll remain probably between 6.5 and 7% for the foreseeable future. But once that initial one-time inflationary shock from tariffs is over, if the economy remains sort of softer like it is today, I don’t know.
I’m not saying we’re necessarily going to be in a recession, but it just doesn’t have the growth that a lot of investors are hoping for. Or if tariffs wind up doing further damage to the economy, we could face a recession or at least worsening labor market conditions that would cause the fed to lower rates, which will probably drive down bond yields further, and this is why I still believe what I said at the beginning of the year that the path for mortgage rates is down, that is the trend, but it’s going to be slow. And the first half of the year we’re probably going to see rates stay a bit higher, but they could trend down a little bit more in the second half of 2025. I don’t think they’re going to go below 6%. I’ve said I don’t think they’re really, it’s unlikely they’re going to go below 6.25 unless we go into a recession. And I think it’s too early to say that that is a likely scenario. Like I said, the economy is soft, but I think it’s way too soon to implicate anything like a recession just yet. Alright, well, we do have a lot more to cover today, but we do have to take a quick break. We’ll be right back.
Welcome back to our economic update here on the market. Now, when I say these things and make these predictions, I like to caveat them and just share my confidence level. This is my training as a data analyst. Usually you prescribe some amount of confidence that you have in your prediction. And I’ll just be honest, my prediction, my confidence level is relatively low right now. But I do think it’s really important as investors that we form a thesis. We need to make a prediction. Even if you don’t really believe it, that strongly say, here is what I think is the most likely thing to happen. And if you don’t believe in it strongly, you may choose to do nothing, but at least in your mind you’re not just saying, I have no idea what’s going on. I’m going to panic or make decisions out of fear.
You need to at least be informed and form an idea of what you think is going to happen. And if your decision from that research and information gathering is that you are going to wait and see, that is a totally fine decision. For me personally, honestly, I don’t actually think it changes all that much. I do personally invest in the stock market. I know some of our other hosts on this channel like James and Henry and Kathy, they’re like a hundred percent invested in real estate. I invest pretty heavily in the stock market. I’m still more in real estate, but I invest in the stock market and I pull back there a little bit for two reasons. One, I don’t see a lot of upside in the stock market right now. I don’t know if it’s going to decline any further, but I think gains this year in the stock market are going to be pretty hard to come by, especially if you’re like me and you just mostly buy index funds.
If you’re really good at picking stocks, I’m sure there’s going to be good stocks to pick, but that’s just not me. And I think index funds are not going to have a particularly good year. At the same time, high yield savings accounts, money market accounts are still pretty good, four point a half percent, still well above inflation, so it’s not a bad place to park money and wait for future real estate deals because I do see this sort of softening housing market with lower mortgage rates coming and I’m wondering, I’m not saying yet, but it seems like there could be a good opportunity to buy in a couple of months here. I would buy right now if I found a great deal. I’ve actually been looking for deals I’ve offered on a few, but I think the environment for better deals might be coming in the next couple of months, particularly in multifamily, but maybe even in the residential section as well.
So that’s sort of what I’m thinking is I’m going to save some money and look for real estate deals because the stock market is just a lot less appealing to me right now than it has been over the last couple of years. That’s personally what I’m going to do, obviously, because there’s so much uncertainty and there’s never a right answer, there is no right answer about what you all should be doing. So I would actually love to hear from you how you are dealing and reacting to this news. If you are watching this on YouTube right now, let me know what you think. I would genuinely love to know your opinion on what this new economic news means and how you are your investing or your saving or your spending patterns based on it. That’s what we got for you today here on the market. Thank you so much for watching. We’ll see you next time.