Although mortgage rates have seen some improvement since the election dust-up, they remain very high.
At a glance, the 30-year average was hovering around 6.875%, down about 0.25% from its recent high.
It’s been a good few days, but rates are still at least 0.75% higher than they were in mid-September.
Why they are higher is up for debate, but I believe a lot of the movement was driven by the hope that Trump would win the election.
Simply put, his policies are expected to be inflation. And inflation is bad for mortgage rates. The question is will prices continue to improve before he takes office in January?
Mortgage Rate Movement May Be Limited During Presidential Transition
The United States will celebrate its 60th presidential inauguration on Monday, January 20, 2025 in Washington, DC.
That’s about 70 days from now. While we will undoubtedly hear a lot of speculation about Trump’s policies for his second term, it will be just that.
It won’t be until he is in office that we will know more concrete details. So that uncertainty could limit the movement of mortgage rates over the next few months.
Even after he takes office, we can no longer expect answers to policy questions, such as taxes and tax cuts and other objectives.
As it stands, most market participants expect Trump’s second term to be an uphill one, thanks to those expected policies.
For example, taxes on materials such as lumber and steel can increase the cost of building a home, and may be combined with the displacement of factory workers.
Apparently, there are something like 1.5 million undocumented workers in the home construction sector.
If they are displaced from the country, you can have a situation where American workers demand higher wages. That increases the cost of new homes and raises workers’ wages.
Everything basically points to further inflation. The big question though is whether it will actually happen.
It’s one thing to say it, and another to actually do it. Remember, Trump also promised to make housing more affordable and said mortgage rates would go back to 3%, maybe even lower.
Government Spending Versus the State of the Economy
So with Trump’s policies up in the air until the end of January, we will only be able to rely on rumors and economic data to determine the direction of mortgage rates.
For me, it’s a toss-up of Trump’s expected inflationary policies versus the economic data being released between now and then.
These include things like the CPI report, the PPI, the jobs report, and the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index.
The PCE report is used to capture inflation (or inflation) by looking at changes in the prices of goods and services purchased by consumers in the United States.
These economic data have driven mortgage rates higher for much of the past few years since the Fed stopped buying mortgage-backed securities (MBS) under its Quantitative Easing (QE) program.
But it appeared to deteriorate in mid-September after the Fed moved to cut its first rate.
Although a better-than-expected jobs report was released at the time, my suspicion is that the polls were boosted to higher rates in the last seven weeks or so.
Bond traders are paying more attention to the election than economic data, as evidenced by the really weak jobs report released in the first week of November that everyone ignored.
Now that the election is decided and many of Trump’s inflationary policies seem to be baked in (higher mortgage rates), I believe those economic reports will matter again.
Sure, we’ll hear things from Trump every day until he’s inaugurated, but real data should take center stage again.
And if you remember, weak economic data leads to low loan rates, and vice versa. So if we get soft inflation reports and/or high unemployment, rates should come down.
The opposite is also true if inflation heats up again, or jobs/wages are somehow stronger.
Home Loan Rates May Be Temporarily Bound
The takeaway here is that I feel like we’re going to have a long time until Trump takes office.
There are just too many unknowns during a presidential transition, especially one with Trump’s big promises.
Therefore, I expect the bond market to remain very defensive until the picture becomes clearer.
Hedging means that the bond’s yield is less likely to fall, even if it “should.”
Mortgage lenders take their time lowering rates (and are quick to raise them), but they may take longer than usual given the current situation.
The caveat is that if economic data comes in below expectations.
If inflation turns out to be even cooler than expected in the coming months, and unemployment is higher than expected, you could see mortgage rates drop slightly from current levels.
But they may face a bigger fight than usual, at least for now, given the policy changes expected under the new Trump administration.
Read on: How to track mortgage rates using the 10-year bond yield.
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