June 24, 2019
Although President Trump called off his request for tariffs on trade with Mexico a few weeks ago, and the focus last week was on the Fed, we believe it is important for Orion’s brokers to know the impact that tariffs and the trade war with China have on mortgage rates. Namely, will this trade war lead to higher rates, lower rates, or have no impact on your clients? Let’s look at what would lead to each scenario because is important for you to educate your clients.
The issue U.S. trade representatives are attempting to fix is there have historically been higher tariffs on U.S. imports to China than Chinese imports to the U.S., limiting the Chinese markets to American companies while providing easy access to American markets by the Chinese, causing a large hit to U.S. GDP.
As economic theory indicates, growth and expansion for the U.S. economy results in higher rates, usually due to inflation. Additionally rates are usually tied to stocks, meaning we would see higher rates with a rising stock market as money will be pulled out of fixed rate investments, like mortgages, creating more upward rate movement as a result of the supply and demand curve.
Conversely, we could see lower interest rates for your clients if the trade wars continue and begin to include other nations, resulting in a global economic slowdown. The ensuing recession that contracts the economy would result in lower interest rates. Corporate earnings would drop, as would stock prices, which would have investors purchasing more fixed rate assets, leading to more downward rate movement. Finally, rates will likely be unaffected by the trade war (independent variable) if the tariffs remain where they currently are.
The last scenario could be the most likely, as the impact of the tariffs on the overall economy and the necessity of maintaining a certain trade volume with China is overstated. The higher costs to consumers for the tariff costs are about one-half of one percent of their total spending (e.g. an iPhone would go from $1000 to $1005). And the amount of trade between the U.S. and China is a very small percentage of our national economy, with all exports to China amounting to about 0.6 percent of our GDP.
While a downturn in exports to China would have a negative impact on some industries it would have a negligible impact across the whole economy that could be potentially reversed over time with exports previously sent to China sent to other nations. Tariffs can be extremely harmful to both importers and exporters resulting in higher costs and/or lack of production, but talk of the trade war moving interest rates is likely overblown. Fortunately, regardless of tariff levels, Orion is continuing to offer a full set of programs to our brokers so that you can offer them to your clients.