Trump's economic agenda for 2nd term is clouding outlook for mortgage rates

Donald Trump's says he wants to impose tariffs on foreign goods, lower tax rates and lighten regulations, policies that could rev up the economy

Donald Trump's election win is clouding the outlook for mortgage rates even before he gets back to the White House.

The president-elect campaigned on a promise to make home ownership more affordable by lowering mortgage rates through policies aimed at knocking out inflation. But his proposed economic agenda could potentially set the stage for mortgage rates to move higher, some economists and analysts say.

Mortgage rates are influenced by several factors, including moves in the yield for US 10-year Treasury bonds, which lenders use as a guide to price home loans. Treasury yields rose in recent weeks even after the Federal Reserve cut its benchmark interest rate, which influences rates on all types of loans including mortgages. Investors appeared to question how far the Fed should cut rates given the strength of the economy.

Then yields surged further immediately after Trump's victory, sending the average rate on a 30-year mortgage up to 6.79 per cent, according to mortgage buyer Freddie Mac.

Given what we're seeing in bond markets, investors are expecting higher rates under a Trump administration and are starting to position in that direction already, said Danielle Hale, chief economist at Realtor.com. So, if overall rates are higher, that would tend to also mean that mortgage rates would move higher, too.

Trump says he wants to impose tariffs on foreign goods, lower tax rates and lighten regulations, policies that could rev up the economy, but also fuel inflation and increase US government debt and, say some economists, lead to higher interest rates and in turn higher mortgage rates.

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, said Lisa Sturtevant, chief economist with Bright MLS, who no longer forecasts the average rate on a 30-year home loan to dip below 6 per cent next year.

Homebuilding sector analysts at Raymond James and Associates see mortgage rates remaining higher for longer, given the outcome of the election. They also said in a research note last week that first-time homebuyers are likely to face even greater affordability challenges this spring, typically the peak sales season of the year for homebuilders.

Higher mortgage rates can add hundreds of dollars a month in costs for borrowers, reducing their purchasing power at a time when home prices remain near record highs despite a housing market sales slump dating back to 2022.

Elevated mortgage rates and high prices have kept homeownership out of reach for many first-time buyers. They accounted for just 24 per cent of all homes purchased between July 2023 and last June, a historic low going back to 1981, according to data from the National Association of Realtors. Prior to 2008, the share of first-time buyers had historically been 40 per cent.

As more Americans are priced out of home ownership or have to delay buying a home, they're missing out on potential gains from home equity growth, which have historically been a strong driver of personal wealth.

What's more, higher mortgage rates can discourage current homeowners from selling. While the average rate on a 30-year home loan has come down from a 23-year high of nearly 8 per cent last year, it remains too high for many potential sellers. More than four in five homeowners with a mortgage have an existing rate below 6 per cent, according to Realtor.com.

The surge in bond yields last week likely reflects expectations among investors that Trump's proposed economic policies would widen the federal deficit and crank up inflation.

The nonpartisan Committee for a Responsible Federal Budget forecasts that Trump's proposals would increase the federal budget deficit by $7.75 trillion over the next decade.

To pay interest on that debt, the government will likely have to issue more bonds, like 10-year Treasurys. That could lead investors to demand higher yields. As those yields go up, that would push mortgage rates higher.

If inflation were to heat up again, the Fed may have to pause the rate cuts it began in September. Inflation has fallen on an annual basis from a 9.1 per cent peak in 2022 to a 3 1/2-year low of 2.4 per cent as the Fed raised rates to the highest level in decades.

While the central bank doesn't set mortgage rates, its actions and the trajectory of inflation influence the moves in the 10-year Treasury yield. The central bank's policy pivot is expected to eventually clear a path for mortgage rates to generally go lower. But that could change if the next administration's policies send inflation into overdrive again.

The general expectation is still that there are a lot of reasons to expect that mortgage rates could come down, but policy is a pretty big wildcard, said Hale of Realtor.com.

Forecasting the trajectory of mortgage rates is difficult, given that rates are influenced by many factors, from government spending and the economy, to geopolitical tensions and stock and bond market gyrations.

Leading up to the election, housing economists had generally expected the average rate on a 30-year mortgage to drop through the end of this year to around 6 per cent and then ease further next year.

Now, economists at the Mortgage Bankers Association and Realtor.com expect the average rate will hover around 6 per cent next year, while those at First American says it's possible that rates decline to around 6 per cent but not a given.

Redfin's head of economic research, Chen Zhao, meanwhile, has said "it's pretty hard to imagine mortgage rates below 6 per cent next year unless we get a recession."  The National Association of Realtors estimates that the average rate on a 30-year mortgage will bounce between 5.5 per cent and 6.5 per cent during Trump's second term.

If the Trump administration can lay out a credible plan to reduce the budget deficit, then mortgage rates can move downward, said Lawrence Yun, NAR's chief economist.

Regardless, don't expect mortgage rates to return to the lows they hit during Trump's first term, which started in late January 2017 and ended four years later.

Back then, the average rate on a 30-year mortgage ranged from a record-low of 2.65 per cent to 4.94 per cent. Mortgage rates fell sharply in the last year of Trump's first term as the economic fallout from the Covid-19 pandemic led investors to seek the safety of US government bonds, which sent their yields sharply lower.