Trump's victory sends mortgage rates higher
After voters decided that president-elect, the real estate magnate Donald Trump would be the next president to take office, homes just got more expensive.
Since November 8th
, after Trump’s unexpected election victory, the interest rate on government bonds suffered an important decline.
Mortgage interest rates are directly influenced by the movement of government bond. This may seem a bit strange, however, there are logical reasons for this effect. It is due to the fact that they both compete as investments. Mortgage rates follow the bond market in an opposite direction, they are rising as the bond market drops.
Treasuries are used as the benchmark for many forms of credit. Mortgage-backed security prices are connected to the prices of Treasury bonds. As a result, the price of a mortgage-backed security backed by 30-year mortgages will move with the price of the U.S. Treasury 10-year bond. As a result, the interest rate on 30-year fixed rate mortgages will move up or down with the yield of the U.S. Treasury 10-year bond.
Bond investors are concerned that the Trump administration will be spending heavily on infrastructure and will make major tax cuts that could have important inflationary consequences.
The average contract rate on the popular 30-year fixed mortgage loan has increased 40 basis points. In just one week it moved from 3.57% to almost 4%. While the average rate for a 15-year mortgage has climbed to 3.14 percent from 2.88 percent. The For mortgage rate has also increased for loans backed by the FHA, where for the 30-year fixed-rate they increased to 3.73% from 3.61%, reaching the highest rate since April.
Financial experts believe that it would be best to wait a couple of weeks in case you were thinking to refinance ad financial markets will need time to settle after the unexpected election of Donald Trump.
Declining Mortgage Application Rate
As a direct result of the climbing mortgage rates the mortgage applications to purchase a home fell 9.2 percent and have reached the lowest level since January.
Total mortgage application volume is still 12 percent higher than one year ago.
How the Federal Reserve Affects Mortgage Rates
Although the Federal Reserve does not directly decide the mortgage rates, it falls within their responsibilities to create the monetary policies that indirectly affect these rates.
The Federal Reserve Board will be meeting tomorrow (January 31, 2017) to further decide the new monetary. They actually leverage the rate at which banks lend to each other overnight. However, as this rate is used as the benchmark for most consumer interest rates they greatly impact the availability of credit. If you wish to see the meeting minutes of previous sessions, visit this website: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
In conclusion, the mortgage rates could increase if the Fed raises the Fed Funds Rate or suggests future increases.
According to cnbc.com
and the Mortgage Bankers Association: the rates will, "trend higher than we had previously forecast, which will more quickly decrease refis." They still predict a strong home purchase loan market, but they say they will have to "assess the impact of policies as they are rolled out with respect to overall growth and housing market implications."
A raise of 0.5 percent in mortgage rate would result in a yearly payment of $1400 more for a mortgage loan of $400,000.
If it will turn out that under the Trump administration the economy gets a boost and wages rise, then higher interest rates will not have such a great influence over the real estate market.
Consistently rising mortgage rates reduce the number of potential buyers as well as the amount they can afford to pay. Furthermore, homeowners considering a home upgrade could decide to postpone rather than face higher interest costs.