Will mortgage rates rise or fall because of the election? Will either Trump or Clinton impact the rent we pay for real estate money?
Since neither the president nor the federal government directly sets mortgage rates no candidate once elected can just sign a proclamation and directly cause interest levels to change. However, the election results could very much change the cost to finance or refinance a home.
To understand how this might happen consider the Federal Reserve. It has the ability to directly raise bank rates. It can wave its magic wand and rates will rise or fall because it says so. Unlike bank rates, the Fed does not control mortgage rates, but the theory is that if the Fed raises bank rates then mortgage costs will naturally follow in large measure because banks have traditionally been a major source of mortgage funding.
You can see that mortgage rates rise whenever the Fed hints or leaks information that it expects to increase bank charges. And, when the Fed fails to deliver, mortgage rates sink back to lower levels. For example, just before the Fed increased bank rates in December Freddie Mac said the typical 30-year prime mortgage was priced at 3.95 percent versus 3.42 percent last week. That a difference of more than half a percent, or, as some candidates might say, a huge change, the best change.
Mortgage rates today would actually be lower but the banks have parked $2.25 trillion in excess reserves with the Fed, money taken out of circulation. It can be argued that this is a smart strategic move because it makes no sense to lend money at cheap rates, or – take your choice – it can be said that the banks have conspired to raise lending costs, a huge tax on the entire economy.
The ability of banks to raise mortgage rates is now in question. The reason is that an increasing amount of money to finance real estate doesn’t come from banks, it comes from investors worldwide working through nonbanks, mortgage providers not dependent on the traditional banking system for funds. This explains why the Fed raised rates in December and mortgage levels have since taken a nose-dive.
Presidents & Mortgage Rates
But what about our presidential candidates? If one of the two major nominees gets elected will that make a difference in mortgage costs?
The answer, I suspect, is largely no. First, mortgage money flows into the US from across the world. Second, Congress is subject to various lobbyists and many of them don’t want to see higher rates. Third, Wall Street understands that higher rates mean lower corporate profits and that’s bad for business.
But is there any circumstance under which a president cause mortgage rates to rise? Yes. Investors want as little risk as possible and a disruptive presidency could cause interest rates to soar.
So, like the Fed itself, the president is increasingly irrelevant when we look at home financing costs. Then again, the presidency is not without its powers, including the ability to move markets.
(Photo courtesy of Javier M.)