The average home price in the Portland Metro fell 2% in October while the median home price was virtually flat. This indicates that the brunt of the 2% drop was felt by listings priced well above the median home price. This certainly matches what realtors are seeing on the ground. Homes priced over $700,000 have been doing large price cuts in many areas. On the other hand, the market for properties priced between $400,000-$550,000 is moving much faster, especially for properties in move-in ready condition. Inventory fell to 2.9 months so we are now officially back in a seller’s market. However, it doesn’t really feel like market conditions have improved yet. Normally when the presidential election is over, the housing market warms up from pent-up demand. This is because a certain percentage of buyers and sellers were waiting for clarification on how government policy could affect their decision making. Now they have some idea of what to expect. This will lead to a more active market in the coming months.
The 30 year fixed rate averaged 6.79% across the United States last week. Mortgage rates have been increasing since September 19th when the 30 year fixed rate bottomed out at 6.09%. As the odds of a Republican election sweep increased, this drove bond yields and mortgage rates higher in real time. Over the last 3 months, 10 year treasury yields tracked the election odds remarkably closely. This was due to the inflationary nature of the tariffs that have been proposed. The incoming administration has proposed a minimum tariff of 10% on imports from every other country with a 25% duty on Mexican imports and a 60% duty on Chinese imports. These duties would raise U.S. tariff levels to 17.7% on average, the highest since 1934, according to the Conservative think-tank the Tax Foundation. The process to complete legislation required to raise the levies could take nearly a year according to Oxford Economics, meaning 2026 is when they will impact the U.S. economy if they are implemented.
An example of one obvious impact of the tariffs would be in auto manufacturing. The United States has a trade agreement with Canada and Mexico under the North American Free Trade Agreement (NAFTA). This allows car parts to be made in all three countries without trade barriers, lowering the cost of domestically manufactured cars since some of the parts are not made in the United States. If the proposed tariffs on Mexican and Canadian imports are introduced this will cause all kinds of unintended consequences in U.S. manufacturing. We could see auto prices rise 10% overnight and it would take years to move the entire production chain stateside. While U.S. iron and steel production is sufficient to cover domestic demand, foreign imports satisfy 44% of U.S. refined copper demand. Getting more copper mines online in the United States is going to take longer than the next Presidential term. The cost of copper in the U.S. could potentially rise 10% over what it trades for internationally for at least a few years. Canada and Mexico will also likely retaliate with their own tariffs if NAFTA is broken. U.S. exports in countries that retaliate will cost more to foreign consumers, reducing demand for U.S. products globally. This same scenario applies to microchips, food and many other goods we consume. For example, the most advanced microchips used for Artificial Intelligence (AI) are produced by Nvidia in Taiwan. 88% of global microchip production is outside the U.S. and that will not change for several years. 15% of food consumed in the United States is imported, primarily in the form of fruits and vegetables from Canada, Mexico and the Caribbean. If implemented in full, economists estimate U.S. tariffs on imported goods will increase the rate of inflation by 1.1-1.2% and raise living costs for the average American household by $2000-$4000 in the first year.
The Consumer Price Index (CPI) came in at 2.4% on October 10th. However, core inflation remains sticky at 3.3%. Following the election, the Federal Reserve cut the benchmark lending rate by 0.25% on November 7th. This was already planned and fully priced into bond yields so it didn’t change the short term outlook for mortgage rates. An additional 1.2% increase in the rate of inflation could take core CPI back above 4% in 2026 which will affect the future policy decisions of the Fed. While the threat of tariffs makes forecasting mortgage rates in 2025 considerably more difficult, if we see continued deterioration in the health of the U.S. economy, mortgage rates will still fall over the next 6-12 months. I think the 30 year fixed rate will bottom out above 5% with the tariffs in place while there is the potential for mortgage rates to fall under 5% by 2026 if the tariffs don’t come to pass and we see inflation come down enough. All eyes remain on the labor market as that will be the main determining factor outside of inflation in deciding where mortgage rates settle next year.
Only 12,000 jobs were added by the U.S. economy in October, well below economists’ expectations. The meager job gain was immediately written off by the market with stocks marginally rising and mortgage rates virtually unchanged following the news. The reason the market didn’t react was due to the hurricanes interfering with hiring in Florida along with the Boeing job strike in Washington that further clouded the numbers. Also, the uncertainty over the election slowed hiring activity across the United States in October. At the same time, the initial reports of job growth from August and September were revised heavily downwards. 301,000 jobs were added by the U.S. economy in August and September combined, down 27% from the initial estimate of 396,000. Clearly the job market is weaker than was being reported over the last couple months as I had predicted. Eventually this will affect Fed monetary policy but we likely need another bad jobs report, or two, to materially improve the outlook for mortgage rates.
