Mortgage rates surge as Trump's victory reshapes housing market outlook

[UNITED STATES] The outcome of the 2024 presidential election has sent shockwaves through the financial markets, with mortgage rates experiencing significant volatility in response to Donald Trump's victory. As the dust settles, homeowners and prospective buyers are left wondering: what's next for mortgage rates under the new administration?

The Trump Effect on Mortgage Rates

Immediate Market Reaction

In the wake of Trump's election win, Treasury yields surged, putting upward pressure on mortgage rates. The yield on the 10-year Treasury, a key benchmark for mortgage rates, climbed nearly 20 basis points to 4.48%, its highest level since early July. This immediate market reaction reflects investors' expectations of stronger economic growth and higher inflation under a Trump presidency.

Short-Term Rate Increases

Experts predict that mortgage rates will continue to rise in the coming weeks as a direct result of the election outcome. Lisa Sturtevant, chief economist for Bright MLS, stated, "Trump's fiscal policies can be expected to lead to rising and more unpredictable mortgage rates through the end of this year and into 2025". This volatility is already evident, with the average 30-year fixed-rate mortgage jumping to 7.13% on November 6, up from 7.04% the day before the election.

Long-Term Outlook

While the short-term forecast suggests higher rates, economists remain optimistic about the long-term trend. Ralph McLaughlin, senior economist at Realtor.com, believes that "the good news is we still expect the long-run trend in rates to be downward as the fight against pandemic-induced inflation comes to an end". However, he cautions that rates may stabilize at a higher level than initially expected before the election.

Trump's Economic Policies and Their Impact

Proposed Tariffs and Tax Cuts

Trump's campaign promises included implementing tariffs on imports and significant tax cuts. These policies are expected to have inflationary effects, which could keep mortgage rates elevated2. Economists at Nomura have raised their forecast for the terminal fed funds rate—the level at which policy rates are neither restrictive nor accommodative—to 3.625% from 3.125%, citing the potential economic impact of Trump's proposed policies.

Inflation Concerns

The proposed tariffs, potentially as high as 20% on all U.S. imports, are expected to raise prices for importers and consumers alike. Nomura analysts forecast that import duties could rise from an average rate of 2.5-3% today to 11-12% in 2026, potentially lifting inflation to 3.1% in 2025 and 2.7% in 2026. This inflationary pressure could deter the Federal Reserve from cutting interest rates as aggressively as previously anticipated.

Federal Reserve's Response

Potential Rate Cut Delays

The election results have cast doubt on the speed and depth of future Fed rate cuts. While most market participants still expect a 25 basis point cut at the upcoming Fed meeting, the probability of a December rate cut has decreased. This uncertainty could contribute to keeping mortgage rates higher for a more extended period.

Fed's Cautious Stance

Fed Chair Jerome Powell has signaled that the central bank won't rush to make rate cuts, which has dampened hopes for lower mortgage rates in the immediate future6. The Fed's cautious approach, combined with the potential inflationary effects of Trump's policies, suggests that the path to lower mortgage rates may be longer and more gradual than previously expected.

Impact on Housing Market and Homebuyers

Affordability Challenges

The rise in mortgage rates poses significant challenges for homebuyers, especially first-time and moderate-income buyers. Lisa Sturtevant notes, "Over the longer term, homeownership could become harder to attain for the first-time and moderate-income homebuyers as his policies favor high-income individuals and existing homeowners".

Market Dynamics

The housing market, which has already been grappling with high prices and low inventory, may face additional pressures. Higher mortgage rates could further reduce affordability, potentially cooling demand and slowing home price appreciation. However, the limited housing supply could prevent significant price drops, maintaining a challenging environment for buyers.

Strategies for Homebuyers and Homeowners

Be Prepared to Act Quickly

Given the volatile nature of the current mortgage market, prospective homebuyers should be ready to move quickly when opportunities arise4. This includes having finances in order, getting pre-approved for a mortgage, and being prepared to make decisions swiftly in a competitive market.

Consider Adjustable-Rate Mortgages

In a rising rate environment, some buyers might find adjustable-rate mortgages (ARMs) more attractive. ARMs typically offer lower initial rates compared to fixed-rate mortgages, which could provide short-term affordability benefits. However, buyers should carefully consider the risks associated with potential rate increases in the future.

Refinancing Opportunities

For existing homeowners, the potential for future rate decreases might present refinancing opportunities. While rates are currently elevated, keeping an eye on market trends and being prepared to refinance when rates dip could lead to significant savings over the life of the loan.

The trajectory of mortgage rates in the wake of Trump's election victory remains uncertain, with short-term increases likely but long-term trends pointing towards moderation. The interplay between Trump's economic policies, Federal Reserve decisions, and broader economic indicators will shape the mortgage landscape in the coming months and years.

For homebuyers and homeowners, staying informed about market trends, being prepared to act on opportunities, and considering various mortgage products will be crucial strategies in navigating this evolving financial environment. While challenges persist, particularly in terms of affordability, the housing market's resilience and the potential for economic growth under the new administration may present unexpected opportunities for those ready to seize them.

As the new administration takes office and begins implementing its economic agenda, all eyes will be on the White House and its impact on the mortgage market. The coming months will be critical in determining whether the path to lower mortgage rates remains viable or if a new normal of higher rates will persist in the American housing market.