The Stop-Start Nature of Tariffs Drives Market Moves - 3.7.25

by Ryan Schoen, Principal Market Analyst

Quick Hit

While Wall Street is down (stock market), Main Street remains strong (home prices) as far as asset performance goes. Tariffs and other headline risks will continue to provide market catalysts that could suppress consumer sentiment, tame consumer spending, and may limit demand-side risks that would cause an acceleration of inflation. The goal appears to be short-term pain for long-term gain coming from this administration.

Key Points & Stats

1. The White House continued its on-and-off-again stance on tariffs, pledging to temporarily exempt many imports from the 25% tariffs that recently went into effect, delaying to April 2nd.

2. The S&P 500 and Nasdaq have now completely retraced, giving up all of the gains made since election day. Since the recent peak, the S&P 500 has retraced 7.08% and the Nasdaq has given up 11.06%.

3. Recent GDP forecasts continue to be revised down. The downward forecasts coincide with some other measures that are showing a growth slowdown, potentially shaking market sentiment and altering investment strategies.

4. Since 2000, housing had just a 26.4% chance of experiencing a price drop greater than 5% at any point, whereas an investor in the S&P 500 Index had a 62.3% probability of facing the same decline. This highlights the relative resilience of home prices nationally.

5. As of 3Q2024, the value of the real estate market has risen to $48.2 trillion. At the same time, mortgage debt outstanding has grown to $13.3 trillion. The slower growth in mortgage debt has equated to owners’ equity in real estate reaching $35.0T pushing its share of real estate market value to a 60 year high of 72.5%.

6. Active listings continue to rise across the country, but still no major sign of a decline in home prices accompanying its growth.

The Dizzying News Cycle Continues to Weigh on Markets

As the old saying goes, “the only certainty is uncertainty.” Such is life, politics, the economy, and of course, the current landscape that market participants find themselves navigating to a heightened extent. On Thursday, the White House continued its on-and-off-again stance on tariffs, pledging to temporarily exempt many imports from the 25% tariffs that recently went into effect. In doing so, the move kicked the can down the road to align with the bigger move on the geopolitical board calling for reciprocal tariffs that have been stated to go into effect April 2.

The latest development in the trade war did little to calm markets as all three major U.S. indices saw a continuation of their recent selloff. The S&P 500, a broad representation of the U.S. economy, balancing both growth and value stocks across 11 sectors, is on pace for its worst week since September. It has now completely retraced, giving up all of the gains made since election day before finding short-term support around the 200-day moving average. The Nasdaq Composite, which tracks more than 3,500 stocks, heavily skewed toward technology and growth sectors making it more volatile but offering higher potential upside, has seen a similar move. Since the recent peak, the S&P 500 has retraced 7.08% and the Nasdaq has given up 11.06%, officially marking a “correction” or a pullback of 10% or more.

Among the many flashing indicators likely to have come across screens recently, the Atlanta Fed’s GDPNow estimate is one creating a lot of buzz. Their mathematically-based approach shows revised 1Q2025 GDP estimates falling from 3.9% just one month ago to -2.4%. The key culprit causing the decline is net exports, which took a nosedive, impacting the GDP estimate by -3.84 points and weak consumer spending as PCE growth slipped from 2.78% on February 3 to 0.30%.

This is important to note as two consecutive quarters of negative GDP would mean a technical recession. Bad news for equities, but good news for mortgage rates. However, it's important to note that these nowcast models are volatile and more reliable later in the quarter. Therefor, more data collection is needed. That said, the downward forecast does coincide with some other measures that are showing a growth slowdown, potentially shaking market sentiment and altering investment strategies. If growth does indeed slowdown and inflation doesn’t abate, then we can assuredly expect headline risks pressuring markets further as warnings of stagflation start to appear. This would be a worst-case scenario as slowing growth and rising prices would be a double whammy to households and businesses. As of today, the New York Fed and Dallas Fed models are not calling for such drastic moves in GDP.

With regards to the inflation side of that potential looming double whammy, Treasury Secretary Scott Bessent provided his thoughts on the matter stating, “look, we have the experience of President Trump’s first term, where the tariffs did not affect prices. And it’s a holistic approach, that there will be tariffs, there will be cuts in regulation, there will be cheaper energy. So, I would expect that very quickly we will be down to the Fed’s 2% target. So, I’m expecting inflation to continue dropping over the year.” Let’s hope he’s right and we aren’t witnessing another infamous “inflation is transitory” statement that didn’t come to pass.

Adding support to Bessent’s statement is news that the U.S. will be appointing a new “affordability czar” who will pick “five or eight areas where this administration can make a big difference for working-class Americans.” Among the likely contenders could be housing, car prices, groceries, electronics, and appliances, all of which have notched significant price jumps in the last five years.

Getting back to the stock market story and using history as our guide, we can see that volatility is the name of the game. While housing has offered significantly more stability compared to the stock market. Since 2000, housing had just a 26.4% chance of experiencing a price drop greater than 5% at any point, whereas an investor in the S&P 500 Index had a 62.3% probability of facing the same decline. This highlights the relative resilience of home prices nationally, which tend to move more gradually and are less susceptible to short-term economic shocks compared to equities. Of course, that stability comes with lower potential returns, as the stock market has averaged 7.2% annual returns while the housing market has offered an average return of 4.7%.

Although lower than stocks, there has been hockey-stick-like growth in real estate values, which has led to the market ballooning to $48.2 trillion as of 3Q2024. At the same time, mortgage debt outstanding has grown to $13.3 trillion. The slower growth in mortgage debt has equated to owners’ equity in real estate reaching $35.0 trillion pushing its share of real estate market value to a 60-year high of 72.5%.

While home affordability is an issue that needs to be addressed, the fact of the matter is that the vast majority of households should be hoping for a stock market decline that doesn't come with home price declines. The overwhelming majority of households, based on wealth distribution, depend on it. The bottom 50% of households, now have real estate accounting for 49.1% of their assets. Additionally, those in the 50–90th percentile also have more to lose if housing takes a turn than equities or pensions. It’s the top 10% that are overweight in stock market exposure. Therefore the intricate balance of reducing affordability hopefully continues to come on the interest rate side, at least for current households that own.

Taking a deeper dive into the data, we see a couple trends emerging. Most notably, millennials now own more than 20% of the U.S. home market (defined as anyone born 1981 or later according to Federal Reserve data). The Millennial generation has seen annual growth of 18.8% to $9.7 trillion, while baby boomers, still representing the lion’s share at 41.1%, have seen growth rise at just a 5.2% rate to $19.8T. The value of homes owned by Gen X increased 4.6% to $14.1 trillion, while the silent and earlier generations saw total home values fall 3.7% to $4.6 trillion. On the income percentile breakdown, things have essentially remained flat from a distribution perspective, with the top 20% of earners accounting for 56.6% of the real estate pie.

Familiar Housing Market Trends in February

The decline in mortgage rates since peaking in mid-January, has yet to translate to any meaningful shift in the housing market trends we’ve become familiar with at the national level.

The number of homes actively for sale continued to grow for the 16th straight month on a yearly basis, rising 27.5% in February compared to last year at 847,825 units.

While listing metrics aren’t the best when it comes to definitive home price growth trends, such as indices that will compare the same home sales pairs, we can gain a better understanding directionally when looking to the price per square foot metric. To the end, while the median list price declined -0.84% Y/Y in February, the median list price per square foot actually still signaled growth of 1.16% Y/Y. As you will note in the table, the median square feet of listings have continued to decline, down to a 1,791-size home from 1,818 last year.

While this is positive for home price growth and the story mentioned above for current owners, there does appear to be some continued softening in the market. The total listings with price reductions increased from 30.3% of active listings to 30.9%. This could indicate that homebuyers may find that sellers are motivated and flexible to make a deal happen this spring. With interest rates falling recently and the typical seasonal upswing in demand likely to play out once again like clockwork, median days on the market declined 9.6% M/M from January, so buyers looking to take advantage should do so sooner than later.

Of course, the advice above is location-dependent. While active inventory is up across the country from last year (except in North Dakota) there are markets where buyers could have more time to deliberate given the many options to choose from. The map below makes those markets clear as any state with a blue background showcases housing markets where active inventory in the month of February 2025 has surpassed the average level observed in the month of February for the period between 2017 to 2019. The markets where homebuyers will likely find the most negotiating power are D.C. where levels are up 87.4%; Texas up 23.7%; and Florida up 16.1%.

The general trend, with respect to active listings relative to historic levels, are markets in the South with high levels of new construction and more expensive markets in the West have risen the most, while the Northeast with limited new construction and affordable Midwest markets have risen the least.

Reiterating the strength in home prices can be observed in the map below, which shows that only 10 states have seen a median list price per square foot decline relative to last year. The cross-section between rising active listings and softness in home prices can be seen in the D.C., Texas, and Florida markets, along with a handful of Western states. The states that hit new all-time highs in the metric for the month of February were North Dakota, Wisconsin, New Hampshire and a pocket of geographically close states in Kentucky, West Virginia, Virginia, Maryland, and Delaware.

Going forward, it is anticipated that there will continue to be a divergence in housing market performance at the regional and state level as the economic cycle evolves.

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