Election Results and Mortgages
Please excuse the tardiness of this post! Like most writers, I had to scrap my thoughts and prognostications about what a President-Elect Clinton will do to our markets.
So, what mortgage environment we should expect from President Trump?
That’s a great question! At this point, I recommend caution. Beware of anybody who claims to know exactly what’s going to happen. Markets are also known for over-reacting to news and later reversing course. Dow futures were down 750 points election night, yet the Dow set a record high the next day. The only absolute truth is that nobody is completely certain of what is coming.
Mortgage Interest Rates
My educated guess? Our equity markets responded favorably. The Dow set a new record high on expectations of pro-business policies from the incoming administration. Bonds have notably dropped. If equity investors are correct, we may face the reality of inflationary pressure. Inflation forces the Fed to increase interest rates. Perhaps not coincidentally, mortgage rates shot up last week. Though not unprecedented, we rarely see these sorts of jumps in mortgage markets. Bond markets hate uncertainty, and we’ve gone from the uncertainty of an election, to the uncertainty of an unexpected election, and finally to the uncertainty of President Trump.
The Financial Press will carefully weigh President-Elect Trump’s words in the coming weeks. We will see additional rate increases if Trump says anything interpreted as signaling policies which will increase inflation. Watch for strong numbers in Retail Sales and Industrial Production numbers as additional indicators of future rate increases due to inflationary pressure.
Before running scared, remember that mortgage rates averaged over 8.25% over the last 45 years. Going from 3.5% to 3.75%, or even 4.0-5.0%, is hardly cause for concern.
Mortgage Interest Rates, Housing Prices, and Affordability
Housing prices have rebounded from the recession. Some have argued that home prices entered bubble territory in certain markets. However, homes are still affordable because interest rates remain low. But housing affordability will decline if interest rates rise.
What does this mean? Buyers need a sense of urgency and must be ready to move quickly. Considering only last week’s change, a $250,000 30-year loan costs an additional $420.00 of interest per year or $12,600.00 over the life of the loan. Assuming we rise to 5.5% from 3.5%, which is still low compared to historic averages, that $250,000 loan costs borrowers an additional $3,552.00 per year or $106,560.00 over the life of the loan.
Sellers need to understand that their buyer pool shrinks as interest rates rise. Banks consider the cost of the home relative to potential buyer’s income and liabilities. While a quarter-point difference strikes only a handful of buyers, a 3.5% to 5.5% change could knock many buyers from contention at all levels. Whether first time buyers struggling to get their first home or move-up buyers seeking a palace, interest rate hikes affect all borrowers.
So how do homes remain affordable when interest rates rise? Unfortunately for sellers, the system self-corrects with lower prices. Fewer buyers means less competition, which means less demand, which means lower prices. Lower prices make homes affordable again.
The Mortgage Regulatory Environment
It’s no secret mortgages are more difficult to obtain since the Great Recession. President-Elect Trump has signaled that he is open to gutting or repealing Dodd-Frank. The Dodd-Frank law is what requires lenders to more carefully vet potential homebuyers and discourages or outright ended risky lending practices. On the positive side, more borrowers will qualify for mortgages. Lenders have also avoided serving certain market segments over legal liability concerns. Lowering the danger of Dodd-Frank violations will encourage lenders to serve these market segments. On the negative side, more mortgages will fail and foreclose.
So, what does all of this mean..?
Higher interest rates make homes less affordable. Lower affordability leads to fewer buyers, but the system self-corrects with less competition and lower prices. However, assuming Dodd- Frank is gutted or killed entirely, lenders will be free to offer riskier borrowers more products and options. This could keep those buyers in the market, though it carries the risk of higher defaults as well.
While nobody knows what is coming or what to expect, here are some realities:
1. Even before the election, we expected interest rates to rise. However, we’re seeing rates rise more quickly than expected and we may see larger interest rate hikes than expected.
2. Higher interest rates make properties more expensive and less affordable to buyers. This higher price comes with absolutely no value added to the property.
3. The loosening of the mortgage regulatory environment may blunt the impact of interest rate increases, but “blunting” something is not “stopping” something.
My advice is to make your move now. I do not say this as a Realtor who wants to make sales, but as someone who expects:
1. Buyers to benefit from lower interest rates over higher interest rates.
2. Sellers to benefit from a larger buyer pool over a smaller buyer pool.
You will not enjoy these benefits if you wait. Questions? Mike Kwiatkowski of Coldwell Banker Residential Brokerage is happy to help. He can be reached at firstname.lastname@example.org or at (414) 207-2938.