Why Mortgage Rates Are Climbing After Trump’s Election Win

Many are wondering, the day after a monumental election season, what will happen to mortgage rates?

As we wrote in June 2024, a Trump victory would likely cause higher rates. Let’s find out what’s going on.

2024: A Repeat of 2016?

Those who were around in 2016 remember a massive rate increase shortly after Trump’s unexpected win over Hillary Clinton.

Back then, few expected a Trump victory. It caught markets by surprise, sending rates up in short order after the election.

Something similar is happening now. While Trump’s dominance in the election wasn’t expected, a win was not out of the question to markets.

This is proven in that rate increases started before the election. Markets priced in a bigger chance of a Trump victory.

Freddie Mac reports that mortgage rates jumped from 6.08% in September to 6.72% just before the election. This increase was initially caused by a stellar jobs report released on October 4. However, rates kept rising in late October in anticipation of a Trump victory, says Fortune.

But the fact that rates are rising is obvious by now. The question is why.

Markets Predict Tariffs, a Strong Economy, Higher Inflation

Inflation is bad for mortgage rates, and Trump is seen as an inflationary leader in a few ways.

First, NBC reports that he has proposed a 10% tax on all non-U.S. goods and has floated the idea of penalties for companies that outsource labor. These types of policies would drive up costs for companies, which would make goods and services more expensive.

In 2018, he implemented a 25% tax on imported steel and 10% on aluminum, which raised the costs of construction, among other things.

Higher prices driven by new policy is another way of saying "inflation."

Additionally, markets expect a strong economy under Trump, viewed as the more pro-business candidate. According to American Century Investments, Trump plans to cut corporate taxes from 21% to 20%, while Harris had planned to raise corporate taxes to 28% and increase taxes on stock buybacks from 1% to 4%.

If companies truly are stronger under Trump, they will hire more and pay more, leading to “wage-push inflation.” This is when companies, under a tight labor market, fight harder for employees with higher pay. Companies then pass on on these costs to consumers in the form of higher prices for goods and services, the very definition of inflation.

And, with a hotter job market, the Fed is less likely to continue cutting rates, pushing up rate expectations throughout the economy.

Why Is Inflation Bad for Mortgage Rates?

In short, investors lose money on mortgage bonds if inflation rises above the interest rate they are earning.

But lets back up a bit.

Mortgage rates are determined by bonds called mortgage-backed securities or MBS. Investors buy these bonds to get a return (interest). It’s a little like an individual purchasing a CD.

Assume you have $10,000 and you want to earn interest on it. You buy a CD paying 4% or $400 per year.

Then inflation rises to 6% a year. Though you are making $400 on paper, your $10,000 decreases in value by 6% or $600. At year’s end, you lost $200.

Investors won’t buy MBS unless they are pretty sure they will make money or at least not lose money. So mortgage companies must issue higher rates to match or exceed future inflation and account for mortgage defaults and other costs of servicing the mortgage.

So when inflation prospects rise, so do mortgage rates.

Investors Flee “Safe Haven” Assets Under a Strong Economy

Expected inflation isn’t the only reason mortgage rates are rising.

In uncertain economic times, investors pull their money from a shaky stock market and invest in “safe haven” assets like U.S. Treasuries and mortgage bonds. Investors don’t expect a huge return, but they are protected against huge losses.

But the opposite is true when investors expect outsized returns from stocks. On the morning of November 6, the Dow Jones Industrial Average was up 3.5%, nearly 1,500 points, a drastic increase. Investors might make more in one day than they would investing in a mortgage bond for an entire year.

When investors are making so much in the stock market, rates of return (interest rates) on mortgage bonds must rise. This keeps investors buying these bonds. Mortgage rates rise, then, since they are tied to the interest rate investors receive.

All this can be confusing. But in a nutshell:

Hotter Economy = Higher Mortgage Rates

Will Interest Rates Ever Come Down Under Trump?

It’s not time to lose hope, though.

Mortgage rates fell the last time Trump was president, and they could again.

Last time, it took about two years for rates to top out near 5%. Bt then in 2019, 30-year fixed mortgage rates drifted downward, falling below 4% long before the pandemic.

Every economy and period of history is different. This surely isn’t the exact pattern for the next four years. However, it is a message not to give up hope that rates could fall again.

Should Homebuyers Wait?

While rates could fall, they also may have just entered a new era of increases.

It’s rarely a good idea to wait to buy a home for someone who can afford it now. Plenty of people waited until after the election to buy a home, but that isn’t panning out well for them so far.

It’s impossible to know what will happen with rates or the economy. But over time, homeowners typically win, even during brutal periods like the 1980s. There are no guarantees, of course, but benefits come to those who control what they can control and make the best of the current market.