Wall Street's anxiety over the Trump administration's trade war with China could herald lower mortgage rates for homebuyers, but a chronic shortage of houses for sale will keep prices high.
Investors fearful that the trade war could sharply slow global economic growth have been buying bonds, sending the yield on the 10-year Treasury note to its lowest level since October 2016.
The average rate on the 30-year fixed-rate mortgage, which tracks the trajectory in 10-year Treasurys, fell last week to 3.60%, its lowest level since November 2016, according to Freddie Mac. It was 3.75% last week. A year ago the rate stood at 4.59%.
If the slide in bond yields continues, the average rate on the benchmark 30-year home loan could fall below 3.5%, housing economists say.
Lower mortgage rates give homebuyers more purchasing power, which could entice them to go house-hunting.
But with the supply of homes for sale down 15% since December, sales are lagging last year's pace. The supply shortage is likely to limit any surge in sales.
"Demand can pick up, but if the supply does not pick up it just means prices will be accelerating higher," said Lawrence Yun, chief economist of the National Association of Realtors. "Supply has been a major bottleneck."
Also, homebuyers may not be immune to Wall Street's jitters about a slowing economy, which could make them feel uneasy about buying a home.
"Given that a home is a major expenditure, people need to be confident about economic prospects over the long haul," Yun added.
Investors have sought out safety in U.S. government bonds this week as the trade dispute between Washington and Beijing escalated again. President Donald Trump announced a new 10% tariff set to go into effect next month on Chinese imports that haven't already been hit with prior tariffs. China retaliated by allowing its currency, the yuan, to weaken against the U.S. dollar.
On Wednesday, the yield on the 10-year Treasury touched its lowest level in nearly three years, falling as low as 1.60% from 1.74% late Tuesday, before climbing back to 1.72%. It was above 3% in late November.
The spread between the 10-year Treasury yield and the average rate on a 30-year fixed-rate mortgage has historically been about 1.7 percentage points, said Odeta Kushi, deputy chief economist at First American Financial.
That means, if the bond yield for 10-year Treasurys drops back to 1.60%, the average rate on a 30-year mortgage could drop as low as 3.3%, though 3.54% is more likely, she said.
At bond yields' current levels, Yun expects the average rate on the 30-year fixed rate mortgage to drop to around 3.4% or even 3.3%.
Such low rates could spur a pickup in home loan refinancing. The last time average weekly long-term mortgage rates were below 3.5% was three years ago.
The scarce supply of homes on the market has kept prices rising this year. The median sales price of a previously occupied U.S. home climbed 4.3% in June from a year earlier to $285,700. By comparison, wage growth has averaged about 3%.
The trend has held back home sales, which were down 2.2% over the 12 months that ended in June. Sales of newly built homes jumped 7% in June, but through the first half of the year have only risen 2.2% from a year earlier, despite such positive trends as a robust job market and falling mortgage rates.
Lower rates may prove irresistible for would-be homebuyers, especially those struggling to keep up with rising home prices.
"It certainly will help to make housing more affordable, obviously, as mortgage rates come down," Kushi said. "The issue will be will folks have something to buy?"