What Will Happen to Mortgage Rates During Trump’s Second Term?
It’s been no secret that most people think mortgage rates will be higher under President Trump.
But because it was telegraphed this time, we saw a very defensive bond market leading up to the election.
Most said that his success in the election was bought by the bond market.
After all, the 10-year yield has risen from 3.65% in mid-September to around 4.40% today.
Likewise, the 30-year fixed rate rose by almost a full rate from 6.125% to 7.125%.
In other words, Trump was expected to win the election and he won the election. So what happens next to mortgage rates during this second term?
Are Trump’s Policies Already Priced Into Mortgage Rates?
While we can never be 100% sure, especially with mortgage rates, one can make a compelling argument that Trump’s victory is included.
As noted, the 30-year default is already up nearly one full percentage point over a six-week period.
And this happened shortly after the Federal Reserve reversed and made its first rate cut after 11 consecutive rate hikes.
The Fed did so because it felt that inflation was falling and monetary policy did not need to remain so restrictive.
Keep in mind that the federal funds rate (FFR) is still much higher than in early 2022, even with recent cuts and expected future cuts.
So it’s not like we’re entering an era of easy monetary policy again, with just less restrictions.
At that same point, we may not go back to 2-4% mortgage rates, but we can still see them come down from recent highs.
In fact, they had been falling well before the Fed cut rates due to cooling economic data and knowledge that the Fed would focus on cutting.
The 30-year fixed rate was about 8% last year, and is down about 200 bps in less than a year. Impressive move down.
But about half of that has been reversed due in part (or all) to Trump’s presidency. The question is, is everything baked? And is it guaranteed?
I would argue that it has, and I would also argue that it is almost certainly not guaranteed.
Why Are Mortgage Rates Expected to Go Higher Under Trump?
Long story short, government spending is expected to be higher under Trump. And his prices are expected to be inflation-adjusted.
Simply put, applying tariffs to foreign goods, even if well-intended to increase production on US soil, often results in those goods becoming more expensive for US consumers.
Instead of exporters lowering their prices, importers pay more and often simply pass the cost on to the buyer.
So an American company that imports goods must pay the government and increase the cost of its goods or take a small profit.
That can lead to higher consumer prices, which is inflation.
Another issue is his immigration policy, with mass deportations to free up jobs and housing.
But in this case, that too could lead to labor shortages and higher wages, which in turn lead to higher costs for consumers.
This also applies to the home construction industry, which is reported to have around 1.5 million undocumented workers. Also, higher costs mean higher prices.
Finally, there is the extension of his Tax Cuts and Jobs Act of 2017 (TCJA), which is scheduled to expire in 2025 and is also inflationary in nature.
Have We Priced Out All The Bad Circumstances While Taking The Best Possible?
At this point, I feel that all of Trump’s inflationary policies have a mortgage rate.
And maybe the price is too far.
Remember, bonds don’t like inflation, so if inflation is expected to rise, bond prices fall and their yields must rise to compensate investors.
The easiest way to track mortgage rates is to look at the yield on the 10-year bond, which often moves in a lock step.
They are up 80 bps in the last six weeks, leading to that 1% increase in 30-year mortgage rates (which are increasing).
But this assumes that all his policies come true. Actions speak louder than words.
Are you really going to chase millions? Are you really going to pay all the taxes? There are many question marks, however the worst seems to be the price already.
Recent moves in the 10-year yield also appear to slow down anything positive happening, which could offset rising national debt and/or inflation.
Trump has called for major cuts in government spending, which could reduce bond issuance. Less supply means higher bond prices.
So when it comes down to it, federal borrowing costs may not be as bad as expected under Trump.
And remember, his second victory was unexpected. It was less predictable in 2016, which is why the 30-year fixed rate jumped from about 3.50% to 4.25%.
But it faded the following year, falling to 3.875%. The high rise this time was larger, and perhaps less appropriate.
Which means a return to September levels would not be out of place.
Finally, what about economic data? It has long been telling the story of economic stagnation, inflation, and rising unemployment.
That is why the mortgage rate dropped from 8% to 6%. Who’s to say that doesn’t continue and outweigh the consequences of Trump’s new term as president.
I would continue to look at the CPI, unemployment, etc. to get some clues as to what the mortgage index is.
Think Trump Doesn’t Really Like High Mortgage Rates
The last thing to consider here is that Donald Trump is not a fan of high mortgage rates.
And he often pointed out how much they’ve risen under the Biden administration. In fact, he said mortgage rates quadrupled while Biden was president.
It wasn’t that bad, but they did nearly triple from their record lows set in early 2021.
Later, Trump promised to lower interest rates while on the campaign trail, often pointing to how high they had risen under Democratic leadership.
In addition, he criticized the Federal Reserve and Jerome Powell and said he could do better, even going so far as to demand a “voice” in setting interest rates.
So it is up to him to strike policies that lead to say 10% of the loan, or even 8% of the mortgage rates, would be a very bad look.
It would be the last thing he would want under this second category. If we consider that, and the uncertainty of his policies to see the light of day.
Then you sprinkle in the fact that the 10-year yield has already risen in line with expectations, and the idea that the economy is in a precarious position, low loan rates start to make sense.
Remember, the 5% mortgage rate will still be much higher than the rates seen in his prime.
The 30-year plan was in 2s for most of 2020, and 3s and 4s from 2017-2019.
Of course, Trump may not be able to bring that back, but he will want lower rates than under Biden.
And that may be the motivation to push them lower than where they are today.
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