What does Trump’s win mean for interest rates?
Interest rates remained relatively steady leading up to the November election only to jump 20 basis points or more after it was announced that Donald J. Trump would be the next President of the United States.
But what does a Trump presidency mean for interest rates and the housing market in the long run? Well, let’s just say, “it’s not time to panic … yet.”
Trump’s impact on the housing market
The news of Trumps win sent bond markets into a tizzy, causing mortgage rates to climb. The 10-year Treasury Note, on which mortgages rates are largely based, ballooned to 2.07 percent, the first time it’s been that high since January.
“Mortgage rates have spiked more than 20 basis points following the results of the presidential election on Tuesday, as we assess the degree of political and economic uncertainty that Trump’s win introduced to the market and as investors move away from U.S government assets, including U.S. mortgage-backed securities, in favor of relatively safer investments,” said Erin Lantz, Zillow Group vice president of mortgages, in a statement.
That said, the fear associated with a Trump presidency is most likely misplaced. Markets are typically more vulnerable following presidential elections in general. This is not unique to Trump. But while the stock market seems to be celebrating, the bond market isn’t.
Why is that? Mostly because of Trump’s campaigning leading up to the election. Trump promised huge tax cuts with the intention of stimulating the economy, but the last time we saw that was in 1981, and 18% mortgage rates were one result.
Trump has also accused the Federal Reserve of artificially keeping interest rates low to benefit Hillary Clinton. With Fed Chair Janet Yellen’s term ending in one year, the future is unclear. One thing we know for sure is once the bond market is destabilized, re-stabilization takes time. A lot of time.
What does 2017 hold for the mortgage industry?
Right now, the economy is strong. We are near what economists call “full employment” and the GDP grew 2.9 percent in the third quarter of 2016. But even before Trump’s victory, inflation was on the rise and interest rates were expected to climb.
While Trump’s win may speed up the process, economists had been expecting higher inflation and therefore higher interest rates.
The mortgage market has been heavily refinance-based for the last several years, but 2017 promises a dramatic shift from a refinance market to a purchase market, according to Freddie Mac. Mortgage originations overall will likely drop from $2 trillion this year to $1.65 trillion in 2017, according to a report from Freddie Mac. Driving most of the decline is a precipitous 41 percent drop in refinance volume likely to hit next year, taking refinance originations from $1 trillion to just under $600 billion.
A full employment economy means wage growth as employers compete for top talent, giving potential homebuyers more money to spend.