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The first week of November 2024 was one of the most eventful periods in modern history. On November 7, the much-anticipated drop in the Federal Funds rate to 4.5% from 4.75% happened. Continuing their plan to reduce the inflation rate to 2% The Federal Reserve made good on their promise of lowering the federal funds rate at a consistent yet measured rate to a range of 3.25% to 3.50 by the end of 2025. Thus, lowering mortgage rates to the 5% to 5.50% range.
This was welcome news for homeowners waiting for mortgage rates to drop into the 5’s so they can refinance their 7% interest rate. In addition, 5% interest rates seem to be an acceptable compromise for current homeowners motivated to sell their existing homes with a sub 4% current mortgage. This would increase inventory for wanna be home buyers currently sitting on the sidelines because there are a limited number of homes on the market.
But not so fast.
Also, during the first week of November there was another momentous event. The landslide victory of Donald Trump in the presidential election. Depending on how your loyalties align, good, bad, or indifferent, Donald J Trump will take the oath of office on January 20, 2025, and for the second time become the President of the United States.
President Elect Trump has promised that he will accomplish many things. Not the least of which is that he will bring inflation under control and rid our country of illegal aliens. These two promises were a significant reason he received so many votes. But he has more leverage over one of these promises than the other.
The President has many things under his control to direct resources and personnel to effectively deport those who are in our country illegally. Other than criminals who are here illegally he has not made clear what fully defines a “deportable” illegal alien. Many, if not most illegal aliens are gainfully employed, paying taxes, contributing to social security and Medicare and in many cases doing jobs that Americans do not, and will not do.
His promise to lower inflation and lower the price of everything will be more challenging to achieve. His plan to implement a 10% tariff on all foreign goods and increase tariffs on China to 60% is not a good start. Tariffs will actually increase prices to Americans.
The definition of inflation is a general increase in the cost of goods and services which over time decreases the amount of goods or services one can purchase for the same dollars. Consumers measure inflation in a more elementary way. “Stuff costs more today than it did yesterday.”
The Federal Funds Rate lowered by the Fed on November 7 is the interest rate that depository institutions (banks) charge each other to borrow funds unsecured, overnight and paid back the next day.
Mortgage rates on the other hand are the rate consumers pay to borrow money secured by real estate and repaid over an extended period of time. Consequently, what the Fed does with the Fed Funds rate has no direct impact on mortgage rates, inflation does.
Assume I am lending money to a homeowner for 30 years and the monthly payment is $1,000. When I receive the first payment, assume I can purchase 100 widgets for $1,000 with that payment.
If the inflation rate is 10% then 100 widgets will cost $1,100 a year from now. For me to offset this $100 increase in cost I will need to charge 10% interest to my borrower so I can still buy 100 widgets. So, if the Federal Funds rate is not a good barometer for monitoring mortgage rates, what is?
The yield or rate on a 10 Year Treasury Bond is most like the average term of a mortgage of seven, which will probably extend to 10 years. As of June 2024 74% of homeowners were paying an interest rate of 5% or less and are less likely to sell or refinance and pay a higher interest rate.
The interest rate of 10-year treasury bonds is determined based on auctions. Bidders base their offers of the interest rate they want to receive in return for lending money to the US government on how inflation will impact their loss of purchasing power in the future.
If government actions are perceived to increase the rate of inflation the 10-year bond rate goes up. This is why President Elect Trumps platform of higher tariffs, in addition to mass deportation of illegal aliens will not be conducive for lower inflation and mortgage rates. Many of his other proposals could also be considered inflationary.
Prior to the election consensus among economists was that by the end of the second quarter (June 2025) we should see lower mortgage rates. The election has changed that to interest rates hovering in the 6% to 7.5% range for the next two years. Extending low inventory as homeowners stay put and landlords can keep rental prices high. Extending the burden of monthly housing expenses and its impact on family’s budgets.
Needless to say, change is coming. Only time will tell if the promises of the campaign will actually Make America Great Again. I hope and pray for our country that they do.
