While mortgage rates have actually seen some improvement since the election dust settled, they are still very high.
At last glance, the 30-year fixed rate was hovering around 6.875%, down about 0.25% from its recent highs.
It’s been a good few days, but rates are still at least 0.75% higher than they were in mid-September.
Why it rose is up for debate, but I believe most of the rise was driven by the expectation that Trump would win the election.
Simply put, his policies are expected to be so Inflationary. Inflation is bad for mortgage rates. The question is can interest rates continue to improve before he takes office in January?
Mortgage rate movement may be limited during the presidential transition period
The United States will celebrate its 60th presidential inauguration on Monday, January 20, 2025, in Washington, DC.
That is, approximately 70 days from now. While we will undoubtedly hear a lot of speculation about Trump’s policies during his second term, it will be just that.
We will not know more concrete details until after he takes office. So this uncertainty may constrain the movement of mortgage rates over the next few months.
Even once in office, we could still wait for answers on policy questions, such as tariffs, tax cuts and other goals.
In the current situation, most market participants expect Trump’s second term to be an inflationary one, due to these expected policies.
For example, tariffs on things like lumber and steel can increase the cost of building homes, and can be exacerbated by the displacement of industry workers.
Apparently, there are approximately 1.5 million undocumented workers in the home construction sector.
If they are deported from the country, you may have a situation where American workers demand higher wages. This increases the cost of new homes and increases workers’ wages.
All of this basically points to more inflation. But the big question is whether that will actually happen.
It’s one thing to say it, it’s another thing to actually do it. And remember, Trump also promised to make housing more affordable, and said mortgage rates would return to 3%, perhaps lower.
Government spending versus the state of the economy
So, with Trump’s policies still up in the air until at least late January, we will only be able to rely on rumors and economic data to determine the course of mortgage interest rates.
For me, it’s become a tug of war between Trump’s expected inflationary policies versus the economic data that will be released between now and then.
This includes things like the CPI report, the Producer Price Index, the jobs report, and of course the Fed’s favorite measure of inflation, the Personal Consumption Expenditures (PCE) price index.
the PCE report It is used to measure inflation (or deflation) by looking at the change in prices of goods and services purchased by consumers in the United States.
These economic data have pushed mortgage rates for most of the past few years since the Fed stopped purchasing mortgage-backed securities (MBS) under its Quantitative Easing (QE) program.
But it appeared to be derailed in mid-September after the Fed turned to its first rate cut.
While the jobs report was released rosier than expected around that time, my suspicion is that the election has pushed interest rates higher over the past seven weeks or so.
Bond traders paid more attention to the election than to economic data, as evidenced by the really weak jobs report released in the first week of November that everyone basically ignored.
Now that the election is set and it appears that many of Trump’s inflationary policies have already been implemented (higher mortgage rates), I think these economic reports will be relevant again.
We’ll certainly hear things from Trump every day until he’s inaugurated, but actual data will have to take center stage once again.
If you remember, weak economic data leads to lower mortgage rates, and vice versa. So, if we get less severe inflation reports and/or higher unemployment rates, interest rates should fall.
The opposite is also true if inflation rates rise again, or jobs/wages become stronger in some way.
Mortgage rates may be range-bound for a period of time
The bottom line here is that I feel like we will be stuck in a range for a while until Trump actually gets into office.
There are many unknowns during a presidential transition, especially one marked by Trump’s big promises.
As such, I expect the bond market to remain very defensive until the picture becomes clearer.
The defense means that bond yields are less likely to fall, even if they “should” in theory.
Mortgage lenders always take their time lowering interest rates (and are quick to raise them), but they may take longer than usual given the current situation.
The caveat is if economic data comes in well below expectations.
If inflation turns out to be cooler than expected in the coming months, and unemployment is higher than expected, you could see mortgage rates fall slightly from current levels.
But they are likely to face a larger uphill battle than usual, at least in the meantime, given the sweeping 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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