Donald Trumps Effect on Interest Rates
Since his election, Donald Trump has had a significant
impact on the housing market, stock market, and mortgage interest rates. Both sides of the isle tend to agree that the markets have shifted dramatically while disagreeing on the causes of the momentum swings. Donald Trump has been accused of having a positive influence on the stock market while also causing dramatic valatility with foreign trade policies. It remains to be seen what the long term economic result will be but through the end of August 2018 we know for certain that mortgage interest rates are on the rise.
Since the begining of 2018 through August of 2018, the total stock market index is up a total of 10%. The small cap portion improved by nineteen percent while the large cap stocks only improved by 4%. In 2016, the total stock market growth was 13.4%. There could be many reasons for the contrast between large and small cap stocks. First, small cap stocks can shift quickly with the times and see responses to market conditions faster than their large cap counterparts. Large cap stocks are more established and tend to need more momentum to shift business practices or see the benefits of market policy. Lastly, I believe that large cap stocks tend to deal more in international trade meaning that it is not only domestic policy but also foreign policy that determines their success. While many argue that Donald Trump has been great for smaller business, the volatility in foreign policy has hurt some larger corporations.
Although the average stock growth has been an improvement, it still only remains 2% higher than the 2016 average growth. Not a dramatic increase but the confidence expressed by investors may be the biggest determining factor when mortgage interest rates change.
The Bond Market Effect
Lenders typically don’t hold onto mortgage loans for the life of the loan. Instead, they create mortgage-backed securities by packaging groups of loans together. These securities, also known as mortgage bonds, are then traded on the bond market. Conditions on the bond market play a large role in determining mortgage rates. When there are a lot of mortgage bonds being purchased for investment, you are more likely to get a lower mortgage interest rate. When there’s lower demand for this type of bond due to competing investing opportunities, mortgage rates rise. The rise in interest rates is supposed to spark investment in mortgage backed securities.
The Federal Reserve
The U.S. government has an interest in keeping inflation low since high levels of inflation cause a decrease in the value of the dollar on the international market. The Federal Reserve, the nation’s central bank, monitors the behavior of the bond market and will intervene to stimulate the economy by lowering the mortgage rate. This is accomplished by buying enough mortgage bonds to lower the interest rate. If raising the interest rate seems appropriate, the Federal Reserve will sell mortgage bonds while raising the Fed Funds rate, which is the rate at which banks borrow money from the Federal Reserve for investment. The trend in policy under Donald Trump has been to raise the Fed rate to stop the rise of inflation and strengthening the value of the US Dollar. Many have argued against this but it very clear without a rise in interest rates inflation could become out of control.
Bonds are Safer
When there’s uncertainty in the economy, many investors look for safer places than the stock market to put their money. Bonds in general are seen as a safe investment, including mortgage bonds. When more investors seek the safety of mortgage bonds, the increased demand leads to a drop in interest prices. On the other hand, when the economy is doing well and the stock market is outperforming bonds, then mortgage bonds are sold off and the mortgage interest rate rises. In this case, the stock market is not driving the mortgage rate but it does play a role in whether it goes up or down. Under Donald Trump investors confidence have risen as showin by the increased investment in the US stock market. This has caused interest rates to rise dramatically since the beginning of 2018.
The Housing Market
Another contributing factor in Mortgage Rates is the supply and demand of homes for sale. When there is low inventory (Fewer homes for sale) but demand is high, lenders typically raise interest rates. If inventory is high lenders typically lower interest rates to attract buyers. In many cases, housing inventory statistics effect interest rates even more than the stock market.
After the “Mortgage Meltdown”, lenders began tightening guidelines making it more difficult for someone to purchase a home. Because it was more difficult to obtain a mortgage, fewer construction loans were offered and home inventory has dropped. The lack of construction lending has also led to higher prices. Any time you have low inventory and high demand, prices typically increase.
If Trump were to deregulate and loosen bank lending guidelines, it would be possible to increase inventory via construction lending and this could lower interest rates. By relaxing lending guidelines we may see a strong stock market, low interest rates, and controlled inflation.
Interest rates are on the rise through August 2018 and unless the Government eases regulation, we will see more interest rate hikes in the future.
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