Mortgage rates have surged nearly half of a percentage point since Donald Trump’s election, increasing borrowing costs in an already expensive Southern California housing market.
Analysts say reasons for the change are two-fold: Foreign investors have pulled out of the bond market because of a lack of confidence, and American investors are taking money out of bonds to put into stocks for a variety of reasons.
Both moves have pushed mortgage rates to their highest point in 2016.
Even though mortgage rates are still considered near historic lows, borrowers feel any bump up in the rate.
For a typical 30-year fixed rate mortgage, the interest rate was 3.59 percent the day before the election, said Mortgage News Daily, and has continued to rise, hitting 4.02 percent Wednesday morning.
Taking into account the change, monthly costs for a San Diego County median price home — $495,000 — have gone up roughly $97 since the election, based on a 30-year fixed mortgage with 20 percent down. That’s nearly $35,000 more over the course of the loan.
Matthew Shaver, a San Diego senior mortgage consultant with Finance of America, said he anticipates rates will go down below 4 percent as the shock of the election wears off — much like Brexit. But, he’s still being cautious.
“I’m telling my clients right now, ‘Let’s wait a couple weeks’,” he said.
Mortgage rates typically track the yield on the U.S. 10-year Treasury. That yield has risen sharply in the past week, but the bond market could still change course as investors become more comfortable with a Trump presidency.
Last December, the Federal Reserve increased a key rate by a quarter-percentage point and mortgage rates were expected to rise — but a surge of investors bought up notes and yields declined, which helped keep mortgage rates low.
Rising rates might not necessarily be a bad thing in the Southern California market, where home prices are rising faster than incomes, said Matthew Gardner, chief economist at Windermere Real Estate. Even though higher rates could slow home sales, it likely would make sellers less bullish on prices.
“If I had a concern at all it was that we were getting into an issue with housing affordability again,” he said. “An increase in rates will take some of the steam out of that market and I don’t think that is a bad thing.”
Gardner said the reason stocks are doing better than bonds is because investors are shying away from any government-backed assets, largely waiting it out until they get more clarification on what Trump will do.
He said the bond yields are also going up because the president-elect is expected to raise deficit spending.
During the election Trump said he would implement an “infrastructure first” policy that would make new infrastructure investments in clean water, the electricity grid, transportation, telecommunications and other aging systems.
“Deficit spending leads to higher inflation,” Gardner said. “The bond market hates inflation. If there’s inflation, it’s likely the Federal Reserve will raise short-term rates to counter inflation.”
Chris Thornberg, economist and founding partner of Beacon Economics, said the problem most industry watchers have at the moment is it isn’t clear exactly what Trump will do in office.
“This is all pure speculation,” he said. “Nothing has changed. The housing market is in the same place, the federal government is in the same place. It’s all predicated on a big increase in the federal deficit as a result of more spending.”
Thornberg said, in addition to infrastructure improvements, deficit spending could increase if there is a tax cut and big spending to pay more federal law enforcement and resources to deport undocumented immigrants.
Trump indicated he would reform the 2010 Dodd-Frank Act,a law that grew out of the Great Recession to protect consumers from abusive lending and mortgage practices by banks. Thornberg said a change could loosen tight regulations, increasing a borrowers’ access to credit and giving a needed boost to the mortgage market. Also, any change, along with tax cuts, would make for a healthy housing market, offsetting the impact of higher mortgage rates.
Thornberg said there are bad scenarios where the Trump administration starts a trade war with Mexico, Canada or China and it could drive the nation into a recession.
“What I find interesting is the markets seem to be looking at the potential positives of Republican Trump, and seem to be downplaying the potential negatives of right-wing populist Trump,” he said.
Gary Kent, a La Jolla-based agent with Keller-Williams, said he hasn’t noticed a Trump effect with buyers yet. But, over the past few years he has seen concern over the Federal Reserve raising rates pushing people to buy and lock in rates ahead of time. With concern over rates going higher and moves anticipated by the Fed, some homebuyers may follow the same trend.
“It tends to spur more people to action and can actually cause a bump in activity,” he said. “But, it might have a small negative effect as people are not able to qualify for as much.”
Many analysts point out mortgage rates are still at historic lows. In November 1981, the rate for a 30-year fixed rate loan was 18.37 percent, declining to 7.73 percent by November 2000. The rate started this year at 3.79 percent.
“Markets seem to be looking at the potential positives of Republican Trump, and seem to be downplaying the potential negative of right-wing populist Trump."
— Chris Thornberg, economist and founding partner of Beacon Economics