The ‘Trump Effect’ and Mortgage Interest Rates – Paul’s Monthly Real Estate Market Newsletter

The Trump Effect and Mortgage Interest Rates

President-Elect Trump hasn't even been inaugurated and he's already 'EFFECTING' the housing market. Since the election, 30-year mortgage rates have increased 50 basis points or 0.5%.

Why did mortgage rates rise? First, it's important to understand that 30-year mortgage rates are typically inversely related to bond prices and directly related to U.S. Treasury yields, so when bond prices drop during a sell-off and Treasury yields rise, mortgage rates usually rise. Equity and bond investors anticipate that Mr. Trump's promised policy of infrastructure spending and tax cuts will result in higher inflation and thus have been selling off bonds, including mortgage bonds. The sell-off has resulted in lower bond prices and higher Treasury yields. A second reason the mortgage rates have increased, though not related to the election, is that the U.S. Federal Reserve Bank is expected to raise the target FED Funds Rate by a quarter point to 0.50%, at their December 15th conference. Note: recent history shows that raising the FED Funds Rate actually reduces mortgage rates. This sounds counterintuitive but increasing the FED Funds Rate helps keep inflation in check and the bond market response is typically favorable.

Sellers, interest rates have risen in the short term, thus reducing home affordability for buyers which may result in decreased buyer demand. Even if demand decreases, the inventory of homes for sale remains at record low levels. The reduced buyer demand will be temporarily offset by the reduced number of homes for sale. This leads me to believe that home prices will remain relatively flat-i.e., with little or no appreciation in the near term. At this time, it seems unlikely that buyers will face the bidding wars we experienced in years past.

Buyers, your housing dollar will not go as far as it would have earlier this summer. The good news is, there will be fewer buyers competing for the limited number of homes for sale. I do expect the market to shift from a strong seller's market to a balanced buyer/seller market. As a side note, a shift to a balanced buyer/seller market is positive for the overall long-term health of our real estate market.

If you're considering buying or selling a home in the upcoming year, let's sit down and discuss your real estate goals. The best way to counteract the uncertainty of the new presidential administration is to develop a carefully thought-out plan. After all, 'Failing to plan is planning to fail' (Alan Lakein)