Chart of the Week
Every Friday, MBA's Chart of the Week provides commentary and analysis on a topic of interest for the industry. This comes from variety of data sources, including proprietary data from MBA's own surveys and studies, as well as from government agencies and other reliable sources of mortgage, housing, and economic data.
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Current Chart of the Week
Since World War II, the consensus among economists has been pro-free trade with the attitude to tariffs summed up by JP Morgan’s David Kelly:
“The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity, and increase global tensions. Other than that, they’re fine.”
On April 2, while there were no updates on earlier tariffs levied on Mexican and Canadian imports, the announcements brought total tariffs on China to 54%, the EU to 20%, Japan to 24%, and India to 26%. Wednesday’s announcements would put the total U.S. average effective tariff rate at 22.5%, roughly ten times as high as before 2025. We expect this increase in tariffs will result in slower economic growth and higher inflation, both headwinds for the housing market.
From our industry’s perspective, it is instructive to ask what tariffs could mean for borrowers’ disposable income and how they could affect debt-to-income ratios.
This week’s chart highlights The Budget Lab at Yale’s estimates of the effects of the April 2 announcements and all 2025 tariffs. While there is profound uncertainty concerning how long these tariffs will be in place and how our trading partners will react, it is a useful benchmark for analysis.
On average, the April 2 tariffs, together with all previously announced 2025 tariffs, would raise consumer prices in the short run by 2.3%, equivalent to an average loss of purchasing power of $3,800 per household in 2024 dollars. However, tariffs act as a regressive tax and the percentage change in disposable income is 2.5 times as much for households in the second decile (-4.0%) as those in the top decile (-1.6%).
To illustrate, suppose a typical household with an income of $80,000 has a $2,000 monthly housing payment (i.e., a 30% payment-to-income ratio). The disposable income for this median 5th decile household drops by $3,011, or $251 per month. In other words, in the short run, the household would have its after-housing (but pre-tax) monthly disposable income drop from $4,667 to $4,416 – equivalent to a 5.4% decrease.
Current homeowners may be insulated from the full effects of tariff price increases described above as principal and interest payments on a fixed-rate mortgage do not change as prices increase. However, tariffs may act to further erode housing affordability. This will happen through potentially fewer interest rate cuts to the Fed Funds Rate but also through increased building costs for new homes. For example, the National Association of Home Builders estimates an average cost increase of $9,200 per home due to tariff actions before April 2.
It is important to note that offsetting these negative impacts, at least for a time, is the sizeable drop in rates, with the 10-year Treasury dropping below 4 percent and almost 30 basis points lower since markets opened on April 2, back to its lowest level since last October.
MBA Research will keep following developments and keep members updated.
- Mike Fratantoni (mfratantoni@mba.org), Edward Seiler (eseiler@mba.org)