Can mortgage rates improve significantly before Trump’s inauguration? Loaner

Although mortgage rates have already seen some improvement since the election dust settled, they remain quite high.

At last glance, the 30-year fixed rate was hovering around 6.875%, down about 0.25% from its recent highs.

It’s been a good few days, but rates are still at least 0.75% higher than they were in mid-September.

Why they are higher is up for debate, but I think most of the rise is due to hopes that Trump will win the election.

Simply put, its policies should be inflationary. And inflation is bad for mortgage rates. The question is, will rates continue to improve before he takes office in January?

Changes in mortgage rates could be limited during the presidential transition

The United States will celebrate its 60th presidential inauguration on Monday, January 20, 2025 in Washington, DC.

That’s in about 70 days. Although we will no doubt hear a lot of speculation about Trump’s policies for his second term, it will be just that.

Only when he is in office will we know more concrete details. This uncertainty could therefore restrict the movement of mortgage rates over the coming months.

Even once he is in power, we may still wait for answers on policy issues, such as tariff and tax cuts and other goals.

As it stands, most market participants expect Trump’s second term to be inflationary, due to the expected policies.

For example, tariffs on products like lumber and steel could increase the cost of building homes and could be compounded by expulsions of industry workers.

Apparently, there are about 1.5 million undocumented workers in the residential construction industry.

If kicked out of the country, American workers could demand higher wages. This increases both the cost of new homes and workers’ wages.

All of this essentially indicates an increase in inflation. The big question is whether this will actually happen..

It’s one thing to say it, and another to actually do it. Remember, Trump also promised to make housing much more affordable and said mortgage rates would return to 3%, maybe even lower.

Public spending and the state of the economy

So, with Trump’s policies on hold until at least the end of January, we will only be able to rely on rumors and economic data to determine the direction of mortgage rates.

To me, it becomes a tug-of-war between Trump’s expected inflationary policies and the economic data released between now and then.

This includes things like the CPI report, PPI, the employment report, and, of course, the Federal Reserve’s favorite measure of inflation, the Personal Spending Price Index (PCE).

THE PCE report is used to capture inflation (or deflation) by examining the change in prices of goods and services purchased by consumers in the United States.

This economic data has driven up mortgage rates for much of the past several years since the Fed stopped purchasing mortgage-backed securities (MBS) as part of its quantitative easing (QE) program.

But that policy appeared to be derailed in mid-September after the Fed decided to make its first rate cut.

Even though a more positive than expected jobs report was released around that time, I suspect the election pushed rates higher over the past seven weeks.

Bond traders paid more attention to the election than to economic data, as evidenced by a very poor jobs report released in the first week of November that almost everyone ignored.

Now that the election is decided and much of Trump’s inflationary policies already seem entrenched (higher mortgage rates), I think these economic reports will matter again.

Sure, we’ll hear news about Trump daily until his inauguration, but real data should take center stage again.

And if you recall, weak economic data leads to lower mortgage rates, and vice versa. So if we get lower inflation reports and/or higher unemployment, rates should fall.

The opposite is also true if inflation heats up again or employment and wages strengthen in some way.

Mortgage rates could remain constrained for some time

The takeaway here is that I have a feeling we’ll be stuck in a bracket for a while until Trump actually takes office.

There are simply too many unknowns in a presidential transition, especially this one with Trump’s big promises.

This is why I expect the bond market to remain very defensive until the situation becomes much clearer.

Defense means bond yields are less likely to fall, even though they “should” in theory.

Mortgage lenders always take their time to lower rates (and are quick to raise them), but they could take even longer than usual given the current situation.

Caution is in order if economic data falls well short of expectations.

If inflation turns out to be even lower than expected in the coming months and unemployment is higher than expected, mortgage rates could fall significantly from current levels.

But they will likely face a tougher battle than usual, at least in the meantime, given the sweeping policy changes expected under the new Trump administration.

Continue reading: How to track mortgage rates using 10-year bond yields.