The anticipation surrounding President Donald Trump’s potential return to office has sparked intriguing discussions in numerous areas, not least in the housing market. Trump’s potential influence on mortgage rates forms the crux of these debates. During his campaign, Trump robustly promised to boost homeownership by driving down mortgage rates— a strategic move to weed out inflation. Yet, certain pundits conjecture his prospective economic approach might trigger a rise in these rates.
A myriad of elements impacts mortgage rates, with one of the key indicators being U.S. 10-year Treasury bonds. These bonds serve as a guide for lenders when pricing home loans. Ongoing fluctuations in Treasury yields, even in the wake of the Federal Reserve trimming its benchmark interest rate, have been witnessed. This interest rate holds sway over lending rates across the board, incorporating mortgages.
Following Trump’s triumphant victory, yields experienced a substantial hike, which eventually escalated the average 30-year mortgage rate to 6.79%. The investing realm seemed somewhat divided over the extent of rate cuts the Federal Reserve should implement, considering the robust health of the economy.
Trump’s economic vision comprises imposing duties on overseas goods, slashing tax rates, and mitigating regulations. Although such policies promise to spur the economy, they also run the risk of stirring up inflation and piling on U.S. government debt. This could indirectly prompt a rise in interest rates, and consequently, mortgage rates.
Elevated mortgage rates can put prospective homeowners in a bind, curtailing their purchasing power particularly when housing prices present near-record numbers. This is especially the case in a climate where housing market sales have been in a downturn since around 2022.
Escalated mortgage rates teamed with soaring housing prices have rendered homeownership an elusive dream for many first-time buyers. This category of buyers made up a modest 24% of all purchases from July 2023 through June of the following year— a low not seen since 1981. Higher mortgage rates can also deter current property owners from putting a ‘For Sale’ sign in their yard.
Existing homeowners aren’t exempt from the impacts of high mortgage rates. Over 80% of mortgaged properties are tied to an interest rate under 6%. The marked increase in bond yields possibly reflects investor expectations that Trump’s proposed economics could exacerbate the federal deficit and drive inflation upward.
Should national debt rise, the government may be required to roll out additional bonds to meet associated interest costs. This situation could lead to investors seeking higher returns, contributing to an upward trend in yield rates and potentially resulting in amplified mortgage rates.
The Federal Reserve might need to put a halt to rate cuts initiated in September should inflation rear its head once again. While the central bank does not directly set mortgage rates, it significantly impacts the course of the 10-year Treasury yield, a primary influence on mortgage rate movements.
Predicting the future direction of mortgage rates is no facile task. Rates are subject to a broad range of influencers, encompassing elements like government expenditure, the economy’s health, geopolitical conflicts, and fluctuations in the stock and bond markets.
The pre-election period saw housing economists predicting a consistent drop in the average 30-year mortgage rate to roughly 6% by year-end, with a further decrease in the offing for the following year. However, anticipations have now pivoted to foresee a steady rate of approximately 6% in the upcoming year.
That said, the prospect of rates falling to around the 6% mark is not a certainty. Forecasts have to reckon with numerous variables and unknowns. The all-time lows of mortgage rates recorded during Trump’s initial term, ranging from an unrivaled low of 2.65% to 4.94%, may not be a sight we’ll witness again soon.