Mortgage rates are a very complex topic.
It is also misunderstood and oversimplified, with many myths perpetuated by those who work in the industry.
Some people believe that when the Fed lowers interest rates, mortgage interest rates fall by the same amount.
Others may think that the government sets rates one way or another and then lenders offer them accordingly.
The fact of the matter is that none of this is true. Ultimately, mortgage rates are determined by the market, just like many other things you buy.
Does the president set mortgage rates?
The short answer is no.
When it comes to mortgage rates, there is a supply and demand dynamic, just like other commodities.
In terms of mortgage pricing, it is the appetite for mortgage-backed securities that drives interest rates up or down.
Simply put, if there is more investor demand, MBS prices rise and prices can fall.
If there is not much demand, MBS prices decline and prices must increase to promote purchases.
All of this speaks to the market which determines the direction of prices.
So where is the role of the President of the United States in all of this?
Well, you could say that the president certainly plays an indirect role in determining the direction of interest rates because they are driven by the economy.
However, there is no direct order from President Biden or President Trump saying that rates have to be X for them to go to X.
Instead, these presidents can set policies that directly affect the economy, and thus indirectly affect interest rates.
Trump has said he wants to lower mortgage rates, but his policies could have the opposite effect
Some economists have recently expressed concern that some of the policies proposed by President-elect Trump could lead to increased inflation.
Things like tariffs and tax cuts can lead to inflation and raise the prices of consumer goods.
It may also cause mortgage rates to rise in the process since inflation is not a friend of bonds.
To that point, the current (or in this case incoming) president can technically influence mortgage rates.
But again, it’s an indirect effect.
Trump has made clear that he wants mortgage interest rates to be lower, despite what that might do to the housing market, which is already suffering from inventory starvation.
We don’t really need more demand right now, we need more supply.
Stoking demand by lowering prices will not necessarily be in the best interests of most people, namely renters.
Although it will help those who have recently taken out a home loan at a much higher rate as they can make the interest rate and refinancing much better.
It is also important to note that what the president says and what he actually delivers are two completely different things.
It is difficult to keep promises when there are so many external forces besides independent economic data driving policy.
Can the president play a more direct role in mortgage rates?
The caveat is that the president could get a little more aggressive if he intervenes with the Fed directly or reinstates a program like quantitative easing (QE).
There was talk about Trump wants to set interest rates himself And/or replace Fed Chairman Jerome Powell.
In this regard, he can adopt a more direct approach in setting monetary policy and attempt to manipulate mortgage rates. But this may be unlikely.
The most realistic way to push mortgage rates lower would be through another round of quantitative easing, which was a program of government purchases of mortgage-backed securities that resulted in increased demand for mortgages and much lower interest rates.
Arguably, the president could make a case for this, but he would still need support and a good argument to do so.
But a direct order from the president to hold the X ratio fixed for 30 years is not on the cards.
The president has indirect power over mortgage rates, at best
To sum it up, the simplest way to look at this is that the President of the United States has an indirect influence on mortgage rates.
I will say that mortgage rates have been rising a lot lately in anticipation of the incoming administration.
So there has been a lot of speculation about Trump becoming the next president.
This is again indirect because Trump actually wants the opposite to happen.
But it shows you the power the president has in terms of influence and expectations.
If you’re trying to track mortgage rates, it may be better to continue looking at economic data rather than putting forward proposals on a weekly basis.
Or impending trade wars, tax cuts and the like.
Ultimately, bond traders will continue to pay more attention to economic data to drive their decisions.
If the data shows a weak economy, mortgage rates will likely decline under President Trump.
But if the economy shows strength, or if inflation appears to be reigniting due to the new administration’s policies, interest rates will likely rise.
The basic idea here is that there is no individual who sets mortgage rates whether it is the President of the United States (POTUS), the Chairman of the Federal Reserve, or the Secretary of the Treasury.
The free market sets mortgage rates as much as anything else.
Read on: Does the Fed control mortgage rates?
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