Today we woke up to former President Trump as our newly elected President and a Republican Senate. What does this mean for housing? First and foremost, mortgage rates skyrocketed today on the news. Now let’s look at the likelihood of them moving higher or lower in the future.
Last night on my Instagram reel I called the election very early – as soon as the 10-year yield hit 4.41%, since that was my trigger yield. As I write this today, the 10-year yield is 4.45%. My line in the sand was 4.40%; If we close above this level and trigger a follow-on bond sale, mortgage rates could move higher. But I’ll wait until the end of this week to assess this due to the volatility in the markets right now.
Many conservatives on Wall Street have said a Trump victory would mean higher mortgage rates due to bigger deficits, more inflation from rates and less easing from the Federal Reserve. Is their logic correct, or are they talking about their own transactions?
We’ll discuss this topic in more detail tomorrow on the HousingWire Daily podcast. For now some important points:
The Federal Reserve
In 2018, the Fed wrote a paper about rates and the possible inflation they could cause; they concluded that raising rates to combat rate inflation would lead to a recession. This jeopardizes their dual mandate, so fighting a one-off price adjustment would not be in their interest. When interest rates rose recently, housing construction labor also became more at risk. Losing jobs for housing construction workers is critical in my economic cycle work: in every recession dateline, mortgage rates fall in that scenario.
Housing construction workers: gray bars are periods of recessions
When mortgage rates were 6.75%-7.50%, there was no growth in the number of housing construction workers, and currently housing starts and permits are at recession levels. When mortgage rates fell to 6% and builder confidence increased, sales grew. So we have limits to how long we can keep mortgage rates high before we start losing construction workers. The Fed is paying attention to that because that’s part of their dual mandate – something to think about as we move forward.
Production growth and lower shortages
If President Trump wants to grow manufacturing exports, create more manufacturing jobs and keep the economy afloat, he needs a few things:
- The dollar needs to get weaker so we can export more stuff out of the country.
- He also wants rates to go down. At this stage he cannot afford for housing to enter a recession. He also plans to address the deficit as interest payments decline due to lower fed funds rates.
To provide affordable housing you either need lower rates or many more buildings than what we are doing now. I discussed this reality in the HousingWire podcast today and I wrote about the production in December 2016where the emphasis is on the reality of what can happen to production.
Trade war tariffs
Many conservative Wall Street types have said that we will see higher rates because of a trade war that will happen if Trump starts his term with 20% tariffs.
One thing to remember is that Trump didn’t start the trade war tap dance with China until 2018 — two years after he took office — and waited for the tax cuts to take effect. At the time, this caused a lot of market drama and business investment stalled because companies did not know what would happen. So be skeptical that an open trade war will happen right away.
What I describe above are the conditions that will keep mortgage rates high for a long period of time, because President Trump needs lower interest rates and a weaker dollar, and he can’t afford to see housing go into recession if he has affordable wants to attack homes. . This is a complex topic, so I’ll delve deeper into it in our podcast tomorrow. However, keep these important points in mind when thinking about Trump and higher mortgage rates.
