What will happen to mortgage rates during Trump’s second term? Loaner

It’s no secret that almost everyone thinks mortgage rates will be higher under President Trump.

But as has been announced this time, we have seen a very defensive bond market in the run-up to the election.

Many argued that his election victory was already priced into the bond market.

After all, the 10-year yield has risen from 3.65% in mid-September to around 4.40% today.

Likewise, the 30-year fixed rate increased by almost a percentage point, from about 6.125% to 7.125%.

In other words, Trump was expected to win the election and he actually won the election. So what happens next for mortgage rates in this second term?

Are Trump policies already priced into mortgage rates?

While there is never 100% certainty, especially when it comes to mortgage rates, one could make a pretty compelling argument that Trump’s victory is rooted in fact.

As noted, the 30-year fixed rate has already increased by about a percentage point in the space of about six weeks.

And this happened shortly after the Federal Reserve pivoted and made its first rate cut after 11 consecutive rate hikes.

The Fed did this because it believed that inflation was falling and that monetary policy did not need to remain so tight.

Keep in mind that the federal funds rate (FFR) is still much higher than it was at the start of 2022, even with the most recent cut and expected reductions to come.

So it’s not like we’re entering a period of easy money politics again, just a less restrictive period.

Along the same lines, we won’t necessarily return to 2-4% mortgage rates either, but we can still see them decline from recent highs.

In fact, they had fallen well before the Fed cut rates, thanks to slowing economic data and knowledge that the Fed was going to turn to cuts.

The 30-year fixed rate was about 8% a year ago and has fallen about 200 basis points in less than a year. Quite an impressive move down.

But about half of that trend has been reversed in part (or entirely) thanks to Trump’s presidency. The question is: is everything cooked? And is it justified?

I would say that it is, and I would also say that it is probably not justified.

Why should mortgage rates be higher under Trump?

In short, government spending is expected to be higher under Trump. And its prices should be inflationary.

Simply put, placing tariffs on foreign products, even if well-intentioned to boost productivity on American soil, generally results in those products becoming more expensive for American consumers.

Instead of exporters lowering their prices, importers pay more and often pass the cost on to the consumer.

So a U.S. company that imports goods must pay the government and then either increase the cost of its goods or reduce its profit margins.

This could lead to higher consumer prices, which would be inflationary.

Another problem is its immigration policy, with mass expulsions intended to free up jobs and housing.

But in doing so, it could also lead to labor shortages and higher wages, which would again lead to higher costs for consumers.

This also applies to the residential construction sector, which would have has approximately 1.5 million undocumented workers. Again, higher costs mean higher property prices.

Finally, there is the extension of his Tax Cuts and Jobs Act of 2017 (TCJA), which will expire in 2025 and is also inflationary in nature.

Have we incorporated all the bad scenarios while ignoring the potential good ones?

At this point, it feels like all of Trump’s inflationary policies have been baked into mortgage rates.

And maybe the price is too high.

Remember, bonds don’t like inflation. Therefore, if inflation is expected to be higher, bond prices fall and their yields must rise to compensate investors.

The easiest way to track mortgage rates is to look at 10-year bond yields, which tend to move relatively.

They have increased by 80 basis points over the past six weeks, leading to a 1% increase in 30-year fixed mortgage rates (spreads have also widened).

But this assumes that all his policies really succeed. Actions speak louder than words.

Will he really deport millions of people? Will he really impose all the tariffs? There are a lot of question marks, but the worst seems to have already been taken care of.

Recent moves in the 10-year yield also appear to ignore any positive events that could offset rising national debt and/or inflation.

Trump has called for significant federal spending cuts, which could reduce bond issuance. Less supply means higher prices for bonds.

Ultimately, then, government borrowing costs may not be as high as expected under Trump.

And remember, his second victory was not unexpected. This was very unexpected in 2016, which is why the 30-year fixed rate increased from around 3.50% to 4.25%.

But it eased the following year, falling to 3.875%. This time, the increase was more significant and perhaps less justified.

This means that a return to September levels would not be unreasonable.

Finally, what about economic data? He has been telling the story of a slowing economy, falling inflation and rising unemployment for some time now.

This is why mortgage rates fell from 8% to 6%. Who is to say that this does not endure and replace the effects of Trump’s new term as president.

I would continue to look at CPI, unemployment, etc. for clues on the direction of mortgage rates.

Consider that Trump doesn’t like high mortgage rates at all

One last thing to consider here is that Donald Trump is not a fan of high mortgage rates.

And he’s often talked about how much they’ve increased under Biden’s tenure. Actually, He said mortgage rates quadrupled when Biden was president.

It wasn’t that bad, but they almost tripled from their record lows set at the start of 2021.

Later, Trump promised to lower interest rates on the campaign trail, often emphasizing how much they had increased under Democratic leadership.

Additionally, he criticized the Federal Reserve and Jerome Powell and said he could do better, even going so far as to want to have a say in setting interest rates.

So if he adopted policies that lead to mortgage rates of 10%, or even 8%, that would be a very bad idea.

This would be the last thing he would want in this second term. When you take that into account, as well as the uncertainty of his emerging policy.

Add to that the fact that 10-year yields have already risen in anticipation, and the idea that the economy is on shaky ground, lower mortgage rates start to make sense.

Remember that a 5% mortgage rate would still be significantly higher than the rates seen during its first term.

The fixed term of 30 years was 2 for much of 2020, and 3 and 4 from 2017 to 2019.

Of course, Trump probably won’t be able to bring that back, but he will certainly want rates lower than where they were under Biden.

And that could serve as motivation to push them further down than their current situation.