Post Election Mortgage Rates Prediction

November 17, 2024

After Biden's disastrous debate performance in June, I predicted that a Trump presidency would lead to higher interest rates:

"Imposing significantly higher tariffs on all imported goods and "shutting down the border" to immigration in our current low unemployment economy will increase inflationary pressure on prices and wages, while Trump’s promise to make 2017 tax cuts permanent could add to the growing national deficit - more bad news for interest rates"

Now we know Trump will have the opportunity to implement these policies, lets elaborate on why they are likely to be inflationary.

Import Tariffs - Trump proposes to Impose tariffs of 60% or higher on Chinese imports and a broad tariff as high as 20% on imports from all countries. Importers will undoubtedly pass on the majority of these costs to their customers. Consumers may switch to domestically produced alternatives that are now less expensive, but either way the cost of things we buy will increase - i.e. inflation.

Mass Deportations - The US labor market is tight with unemployment at 4.1% in October - that is approximately 7 million Americans currently out of work. Estimates of the numbers of undocumented immigrants Trump would target for deportation range from about 2 to 20 Million (Trumps statements on the subject being characteristically vague). One might think that deporting undocumented workers would make jobs available for some of those 7 million US citizens that are out of work, but the labor market is complicated and economists generally consider 5% unemployment to be "full employment", a level that allows for some fluidity in the workforce.

The link between low unemployment and inflation is debated amongst economists, so isn't clear cut as the link between tariffs and inflation, but there are 2 ways in which economists argue that low unemployment increases pressure on prices. One is that when workers have more disposable income it puts upward pressure on prices - too much money chasing too few goods. Honestly I find it hard to believe full employment puts that much extra money into the economy to have a significant effect on inflation, but the second argument resonates - that when employers are competing for employees they have to offer higher wages, which can trigger a classic wage price spiral as companies pass on higher labor costs to consumers.

Federal Deficits - While import tariffs and mass deportations are likely to have an indirect effect on Mortgage rates - increased inflation usually leads to higher mortgages rates as we have seen over the last 2 years - increased federal deficits have a direct effect. The US government issues debt instruments to cover the gap between its income and its expenses (the deficit). Mortgages rates generally follow one of these - 10 year treasuries - 10 year as this is the average length a mortgage is held. When the government has a higher deficit, it has to issue more debt. The more the government issues the higher the return Investors who buy this debt require. So higher deficits lead to higher mortgage rates.

Room for Hope? Trump promised all these things that would almost certainly lead to higher inflation and interest rates, but he also promised lower inflation, and likely wants lower interest rates as well, so while the markets have reacted in anticipation of inflationary policies being enacted, it might turn out that they are watered down to avoid the worst effects.

So, in conclusion - my prediction is that mortgage rates are unlikely to decline much over the near to medium term. Beyond that they may rise again if Trump enacts the inflationary policies he has proposed. That said there's a popular anonymous quote in the mortgage industry "

“There are two people predicting rates; one doesn’t know where they are going and the other doesn’t know that they don't know where they are going”