It’s been a few weeks since the election and you would think that the financial markets would be settling down. But, so far that does not seem to be the case.
What Was Expected?
While the election was thought to be close, the financial markets were clearly expecting a Clinton victory. To the financial gurus, that meant continued heavy entitlements, higher taxes, low GDP growth, low inflation and the possibility of a recession in 2017. All of this led to ultra-low interest rates. Prior to the election, mortgage rates were around 3.5% for the benchmark 30-year fixed rate mortgage.
What Happened?
As we all know now, Trump won and, it surprised the market makers. Now, if Trump’s Republican Congress gets their way, we should see lower taxes – both personal and corporate taxes; no more 3.8% Obamacare tax; less regulation; and fiscal stimulus that has so far been absent from the weak recovery over the last eight years.
Initial Market Reactions
Based on the above, money quickly moved out of bonds, including mortgage-backed securities, and into U.S. stocks. The move out of bonds was particularly large with mortgage rates rising .50% or more!
What is Likely to Happen Next?
Was the rise in mortgage rates too much too fast? Was it an over-reaction? Only time will tell. The Mortgage Bankers Association of America (MBA) predicts the interest rate for a 30-year fixed rate mortgage will average 4.2% in 2017, increasing gradually from this year’s average of 3.5%. It also expects the Federal Reserve will raise the federal funds rate in December and three more times in 2017. They also forecast an increase in home-buying in 2017 as due to the potential for higher home prices and higher rates.
The Fed meets Dec. 14. They are expected to raise the Federal Funds Rate by .25%. That is almost a certainty. My guess is that they won’t give any hints about possible future rate hikes yet. It’s just too soon to tell what the Trump effect will be despite the optimism over his intentions and a faster-improving economy. I do think that most of the damage is done for now. And, maybe it will settle somewhere between the lows just prior to the election and where they stand for now.
It is important to remember that mortgage rates can and do change daily and they react instantly to financial news and speculation. The recent rise in interest rates assumes this already is already happening; therefore; rates can only rise so far before getting too far ahead of the actual economy.
By Rick Cirelli
Local mortgage broker Rick Cirelli established RTC Mortgage 15 years ago.
