Will Government Changes Wreck Your Property Value?
Everyone’s wondering if the newly-minted Trump administration will cause mortgage rates to rise, Most industry insiders aren’t that concerned about a quarter percent here or there. But a serious increase could fundamentally lower home sales and slash real estate values.
One thing we do know is that mortgage interest rates rose substantially as 2016 ended. According to Freddie Mac, the average rates for 30-year prime loans jumped from 3.47 percent on October 27th to 4.30 percent as of December 22nd.
Trump Bump Or Trump Trend?
However, while rates rose by .83 percent in less than two months – a huge increase – we don’t quite know why.
How much of the spike happened because we believed the Federal Reserve would hike bank rates in December? Or was the sharp uptick caused by the surprise Trump electoral victory? And what about other factors like firming oil prices?
Moreover, we don’t know if the sudden jump in year-end rates is simply a short-term “Trump bump” which will quickly go away during the next few months.
In December 2015, the Fed also increased bank rates by .25 percent. Freddie Mac says that mortgage rates rose from 3.79 percent on October 22nd to 4.01 percent on December 31st.
By mid-2016, the rate for prime loans was down to 3.41 percent, a big drop.
Rising Mortgage Rates And New Faces
We have a new administration coming to Washington. Because many members have no background in elected government, we have no record of past policies and programs to consider.
That can cause a lot of uncertainty, and financial markets don’t like uncertainty.
For instance, Dr. Ben Carson has a compelling personal story. He possesses unquestioned surgical excellence. But as HUD Secretary, will he raise or lower insurance premiums? We just don’t know.
Then, there’s the magic of appointments. The incoming President can name a new director of the Consumer Financial Protection Bureau. That appointee will almost certainly follow the Republican platform.
The platform states that the CFPB head currently has “dictatorial powers” that harm the public.
“Its regulatory harassment of local and regional banks, the source of most home mortgages and small business loans, advantages big banks and makes it harder for Americans to buy a home.”
Presumably with less regulation, lenders can process loans more cheaply, and then charge borrowers lower rates and smaller fees.
No One Person Or Agency Controls Mortgage Rates
Right now, threre are many investors worldwide looking for better places to put their money. Currently, over $50 trillion invested is worldwide at interest rates below .5 percent according to BlackRock, the world’s largest asset manager.
While the Federal Reserve controls the Federal Funds rate – the interest level banks pay to borrow from each other overnight — it has no direct say over mortgage rates. This is why mortgage rates and bank rates sometimes do not follow the same trends.
In a similar sense, the new administration – like the old one – has no direct say over mortgage rates. It can’t issue a news release raising or lowering real estate loan costs.
But let’s not get hung-up over that word direct. Presidents can move markets, including the cost of real estate financing, by influencing policy.
The Federal Reserve
President Trump will be able to name two members to the Federal Reserve’s Board of Governors in 2017, and a new chair and vice chair in 2018.
With new leadership, Fed policies and priorities can rapidly change. For example, many believe the Fed will raise bank rates three times in 2017.
Then again, there were predictions that the Fed would raise bank rates four times in 2016 and then two times, predictions which were both dead wrong.
Keep in mind also that the Federal Reserve is, at least in theory, apolitical. It is not supposed to care which party is in power or what its political goals are.
The Fed’s job is to manage our money supply and balance concerns like inflation, unemployment, and investment — keeping the US financial system as healthy as possible.
How Trump Can Offset Rising Mortgage Rates
If there are three Fed increases of .25 percent each in 2017, short-term interest rates rise by .75 percent. But why would a Trump administration support such results?
Every administration wants to keep interest rates as low as possible to push up corporate profits and stimulate the housing sector.
Lower rates also hold down the interest bill Uncle Sam faces with a $19 trillion deficit.
The Trump administration can impact mortgages rates through its policies. It could, for example, lower the mortgage insurance premiums charged by the FHA as a way to offset higher mortgage rates.
It could reduce the guarantee fees charged by Fannie Mae and Freddie Mac, now both operated by the government. Combine both actions, and the result would substantially offset rising mortgage rates and thus spur the housing sector.
There has been talk in Washington of ending the mortgage interest deduction (MID). Whether such a proposal will ever become a political reality is uncertain. However, a Trump administration could effectively reduce home loan costs pushing to keep this write-off.
Lastly, a Trump administration could surprise everyone and back an increase in the minimum wage, one sure way to offset higher mortgage rates.
Such a policy does not seem very likely, but then neither did the election of this new President.
What Are Today’s Mortgage Rates?
Today’s rates probably changed several times before you even read this post. The key is to provide several lenders with enough information to get meaningful quotes within a short time period. Then compare offers and choose your best rate and terms.