It’s no secret that most people believe mortgage rates will be higher under President Trump.
But because it was sent so dramatically this time, we saw a very defensive bond market heading into the election.
Many have argued that his election victory was already priced into the bond market.
After all, the yield on 10-year bonds has risen from 3.65% in mid-September to about 4.40% today.
Likewise, the 30-year fixed yield rose by about a full percentage point from about 6.125% to 7.125%.
In other words, Trump was expected to win the election and he actually won the election. What will happen next for mortgage rates during his second term?
Are Trump’s policies really compatible with mortgage rates?
Although there is never 100% certainty, especially regarding mortgage rates, one can make a pretty convincing case that Trump’s victory is certain.
As we mentioned, the 30-year fixed rate has risen by nearly a full percentage point in about six weeks.
This happened shortly after the Fed turned around and made its first rate cut after 11 consecutive rate hikes.
The Fed did this because it felt that inflation was falling and monetary policy did not need to remain so tight.
Keep in mind that the federal funds rate (FFR) is still much higher than it was in early 2022, even with the recent cut and expected cuts to come.
So, it’s not as if we’re entering a period of easy fiscal policy again, but rather a less restrictive period.
To the same point, we’re not necessarily back to 2-4% mortgage rates either, but we could still see them coming down from their recent highs.
In fact, interest rates were falling long before the Fed cut rates thanks to cold economic data and the knowledge that the Fed would focus on cuts.
The 30-year fixed interest rate was about 8% a year ago, and has fallen by about 200 basis points in less than a year. Impressive move down.
But about half of that has been partially (or completely) reversed by the Trump presidency. The question is, is all this hidden? Is it guaranteed?
I would argue that this exists, and I would also argue that it may not be justified.
Why are mortgage rates expected to be higher under Trump?
In short, government spending is expected to be higher under Trump. and Its tariffs are expected to be inflationary.
Simply put, applying tariffs to foreign goods, even if in good faith to boost productivity on American soil, typically makes those goods more expensive for American consumers.
Instead of exporters lowering their prices, importers pay more, often passing the cost on to the consumer.
So the American company that imports the goods must pay the government and then either raise the cost of its goods or get lower profit margins.
This may lead to higher consumer prices, which is inflationary.
The other issue is his immigration policy, where mass deportations were aimed at freeing up jobs and housing.
But in the process, this may also lead to labor shortages and higher wages, which again leads to higher costs for consumers.
This applies to the home building sector as well, which It is said It has about 1.5 million illegal workers. Once again, higher costs mean higher housing prices.
Finally, there is an extension of the Tax Cuts and Jobs Act of 2017 (TCJA), which is set to expire in 2025 and is also inflationary in nature.
Have we considered all the bad scenarios while ignoring the potential good ones?
At this point, I feel like all of Trump’s inflationary policies are priced in to mortgage rates.
And perhaps at very high prices.
Remember, bonds don’t like inflation, so if inflation is expected to be higher, bond prices fall and their yields must rise to compensate investors.
The easiest way to track mortgage rates is by looking at 10-year bond yields, which tend to move at a relative pace.
They have essentially risen by 80 basis points over the past six weeks, resulting in a 1% increase in 30-year fixed mortgage rates (and spreads have also widened).
But this assumes that all of his policies will actually pay off. Actions speak louder than words.
Will millions really leave? Will he actually impose all customs duties? There are a lot of question marks, but it seems the worst of it has already been decided.
The recent moves in the 10-year yield also seem to rule out anything positive happening, which could offset higher national debt and/or inflation.
Trump called for massive cuts in federal spending, which could reduce bond issuance. Lower supply means higher bond prices.
So when it comes down to it, government borrowing costs may not be as bad as expected under Trump.
And remember, his second win was not unexpected. It was highly unexpected in 2016, which is why the 30-year fixed yield jumped from about 3.50% to 4.25%.
But it faded by the following year, falling again to 3.875%. The move higher this time was larger, and perhaps less justified.
This means that a return to September levels would not be unreasonable.
Finally, what about economic data? It’s been telling the story of a slowing economy, low inflation, and high unemployment for some time now.
That’s why mortgage rates dropped from 8% to 6%. Who’s to say this doesn’t continue and replace the effects of Trump’s new term as president.
I will continue to look at the CPI, unemployment, etc. for signals on the direction of mortgage rates.
Consider that Trump very much hates high mortgage rates
The final thing to consider here is that Donald Trump is not a fan of high mortgage rates.
He often talked about how much it has risen under Biden. In reality, He said mortgage rates quadrupled when Biden was president.
It wasn’t that bad, but they made nearly triple the record lows they set in early 2021.
Later, Trump promised to lower interest rates On the campaign trail, they often point out how much they have risen under Democratic leadership.
In addition, he criticized the Fed and Jerome Powell, saying he could do it better and even go further. The desire to have a “say” in setting interest rates.
So for him to enact policies that result in mortgage interest rates of 10%, or even 8% on mortgages, would be a very bad look.
That would be the last thing he wanted in this second term. When we take that into account, coupled with the uncertainty about his policies seeing the light of day.
Then add to that the fact that 10-year yields have already risen in anticipation, and the idea that the economy is on shaky ground, Lower mortgage rates are starting to make sense.
Remember, a 5% mortgage rate will still be much higher than the rates he saw in his first term.
The 30-year constant was 2s for most of 2020, and 3s and 4s from 2017-2019.
Sure, Trump probably won’t be able to bring that back, but he will certainly want interest rates that are lower than they were under Biden.
This can serve as an incentive to push them to a lower level than they are today.
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