Mortgage rates are a very complicated topic.
And often misunderstood and oversimplified, there are many myths perpetuated by those working in the industry.
Some people think that when the Fed cuts rates, mortgage rates fall by the same amount.
Some may believe that the government somehow sets the rates and lenders offer them accordingly.
The truth of the matter is that none of this is true. Ultimately, loan rates are set by the market, just like most other things you buy.
Does the President Set Mortgage Rates?
The short answer is no.
When it comes to mortgage rates, there is a variable supply and demand, just like any other commodity.
Driving this mortgage price is investor demand for mortgage-backed securities (MBS), which are bonds that cover a number of mortgages.
Simply put, if there is more investor demand for these bonds, MBS rates go up and mortgage rates go down.
If there is not much demand for MBS, rates should fall and interest rates should be raised to attract more purchases from investors.
All this talk to the doctor the market to determine the rating index, not a politician or any other person.
So where does the president of the United States fit into all of this?
Well, you could argue that the president plays an indirect role in where rates go because they are driven by the economy.
However, there is no direct order from President Biden or President Trump that says the rates must be X so they are set at X.
Instead, these presidents can impose policies that directly affect the economy, and thus have an indirect effect on interest rates.
Trump Said He Wants Low Mortgage Rates, But His Policies May Backfire
Some economists have actually expressed concern recently that some of President Trump’s proposed policies will increase the currency’s strength.
Things like taxes and tax cuts can cause inflation to rise and increase prices on consumer goods.
That could also lead to higher mortgage rates in the process since inflation is no friend of bonds.
At that point, the sitting (or in this case the incoming) president can technically affect loan rates.
But again, it is an indirect effect.
Trump has made it clear that he wants mortgage rates to come down, despite what it might do to the housing market, which is already cut.
We don’t really need more demand right now, we need more supply.
Demanding aggressively by lowering prices will not be of much benefit to most people, namely employers.
Although it can help those who have just taken a home loan at a very high rate as they can make the rate pencil and term refinance much better.
It is also important to note that what the president says and what he actually delivers are two very different things.
And promises are hard to keep when there are so many external forces and policy driving independent economic data.
Can the President Take a More Direct Role in Housing Prices?
The caveat is that the president may become aggressive if he intervenes with the Federal Reserve directly or restores a program such as Quantitative Easing (QE).
There has been talk of Trump wanting to set rates for himself and/or replace Fed chairman Jerome Powell.
In that regard, he can take a more direct approach to setting monetary policy and trying to manipulate housing prices. But that may not happen.
A more logical way to lower mortgage rates would be another round of QE, which was the government’s MBS purchase program that led to a ton of mortgage demand and very low interest rates.
It is possible that the president can open a case for this but they still need support and good arguments to do so.
But a direct order from the president to do X for 30 years unchanged is not in the cards.
The President Has Indirect Power Over Estate Taxes, At Best
To summarize, the easiest way to look at this is that the US president has an indirect influence on mortgage rates.
I will say that mortgage rates have gone up a ton lately in anticipation of the coming administration.
Therefore, there are many theories based on whether Trump can be the next president.
Which is also indirect because Trump would actually like the opposite to happen.
But it shows the power the president has in terms of influence and expectations.
If you’re trying to track mortgage rates, however, it may be better to keep looking at economic data instead of the proposals released every week.
Or the upcoming trade wars and tax cuts and such.
Ultimately, bond traders will continue to care more about economic data to drive their decisions.
And if data shows the economy is weakening, chances are that mortgage rates will drop under President Trump.
But if the economy shows strength, or if inflation seems to be reigning in thanks to the new administration’s policies, rates will rise.
The important takeaway here is that no one is setting the mortgage rates whether it is the president of the United States (POTUS), the chairman of the Federal Reserve, or the secretary of the Treasury.
It’s the free market that determines loan rates like anything else.
Read on: Does the Fed control mortgage rates?
Source link
