What Will Happen to Mortgage Rates During Trump’s Second Term?

It’s been no secret that most everyone thinks mortgage rates will be higher under President Trump.

But because it’s been so telegraphed this time around, we’ve seen a very defensive bond market leading up to the election.

Many have argued that him winning the election was already priced in to the bond market.

After all, the 10-year yield increased from 3.65% in mid-September to around 4.40% today.

Likewise, the 30-year fixed increased nearly a full percentage point from roughly 6.125% to 7.125%.

In other words, Trump was expected to win the election and did win the election. So what happens next for mortgage rates during this second term in office?

Are Trump’s Policies Already Baked in to Mortgage Rates?

While there’s never 100% certainty, especially with mortgage rates, one could make a pretty compelling argument that Trump’s win is baked in.

As noted, the 30-year fixed has already risen about one full percentage point in the span of about six weeks.

And this took place shortly after the Federal Reserve pivoted and made its first rate cut after 11 consecutive rate hikes.

The Fed did so because it felt inflation was coming down and monetary policy didn’t need to remain so restrictive.

Keep in mind that the federal funds rate (FFR) is still a lot higher than it was in early 2022, even with the most recent cut and the expected cuts to come.

So it’s not as if we’re entering an easy money policy period again, just a less restrictive one.

To that same point, we aren’t necessarily going back to 2-4% mortgage rates either, but can still see them come down from recent highs.

In fact, they had been falling well before the Fed cut rates thanks to cooling economic data and the knowledge that the Fed would pivot to cuts.

The 30-year fixed was around 8% a year ago, and fell roughly 200 bps in less than a year. Pretty impressive move lower.

But about half of that has been reversed due in part (or in whole) to a Trump presidency. Question is, is it all baked in? And is it warranted?

I would argue that is has, and also argue that it’s probably not warranted.

Why Are Mortgage Rates Expected to Be Higher Under Trump?

Long story short, government spending is expected to be higher under Trump. And his tariffs are expected to be inflationary.

Simply put, applying tariffs on foreign goods, even if well-intentioned to boost productivity on U.S. soil, typically results in those goods being more expensive for U.S. consumers.

Instead of exporters lowering their prices, importers pay more and often just pass along the cost to the consumer.

So an American company that imports goods must pay the government and then either raise the cost of their goods or take smaller profit margins.

That could lead to higher consumer prices, which is inflationary.

Another issue is his immigration policy, with mass deportations intended to free up jobs and housing stock.

But in the process, that too could lead to a labor shortage and higher wages, which again leads to higher costs for consumers.

This applies to the home building sector as well, which reportedly has around 1.5 million undocumented workers. Again, higher costs mean higher home prices.

Finally, there’s the extension of his 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire in 2025 and is also inflationary in nature.

Have We Priced in All the Bad Scenarios While Ignoring the Potential Good?

At this point, I feel that all of Trump’s inflationary policies have been priced in to mortgage rates.

And perhaps priced in too far.

Remember, bonds don’t like inflation, so if inflation is expected to be higher, bond prices fall and their yields must go up to compensate investors.

The easiest way to track mortgage rates is by looking at 10-year bond yields, which tend to move in relative lockstep.

They’re up basically 80 bps over the past six weeks, which has led to that 1% increase in 30-year fixed mortgage rates (spreads widened too).

But this assumes all of his policies actually come to fruition. Actions speak louder than words.

Will he actually deport millions? Will he actually impose all the tariffs? There are a lot of question marks, yet the worst of it seems priced in already.

Recent moves in the 10-year yield also seem to discount anything positive happening, which could offset rising national debt and/or inflation.

Trump has called for huge cuts to federal spending, which could reduce bond issuance. Less supply means higher prices for bonds.

So when it comes down to it, government borrowing costs might not be as bad as expected under Trump.

And remember, his second win was not unexpected. It was highly unexpected in 2016, which is why the 30-year fixed jumped from about 3.50% to 4.25%.

But it faded by the following year, dropping back to 3.875%. The move higher this time has been larger, and perhaps less warranted.

Meaning a move back to September levels wouldn’t be unreasonable.

Lastly, what about the economic data? It’s been telling the story of a slowing economy, falling inflation, and rising unemployment for some time now.

That’s why mortgage rates dropped from 8% to 6%. Who is to say that doesn’t continue and supersede the effects of Trump’s new term as president.

I’d continue to look at CPI, unemployment, and so on for cues as to the direction of mortgage rates.

Consider That Trump Strongly Dislikes High Mortgage Rates

One final thing to consider here is that Donald Trump isn’t a fan of high mortgage rates.

And he often brought up how much they had risen under Biden’s tenure. In fact, he said mortgage rates quadrupled when Biden was president.

It wasn’t quite that bad, but they did nearly triple from their record lows set in early 2021.

Later, Trump promised to lower interest rates while on the campaign trail, often pointing out how much they’d risen under Democratic leadership.

In addition, he criticized the Federal Reserve and Jerome Powell and said he could do it better, even going as far as to wanting a “say” in setting interest rates.

So for him to enact policies that lead to say 10% mortgage rates, or even 8% mortgage rates, would be a very bad look.

It’d be the last thing he’d want under this second term. When we take that into account, along with the uncertainty of his policies seeing the light of day.

Then sprinkle in the fact that 10-year yields have already surged in anticipation, and the idea that the economy is on shaky ground, lower mortgage rates start to make sense.

Remember, a 5% mortgage rate would still be significantly higher than the rates seen in his first term.

The 30-year fixed was in the 2s for much of 2020, and the 3s and 4s from 2017-2019.

Sure, Trump likely won’t be able to bring that back, but he’ll certainly want rates lower than where they were under Biden.

And that could serve as motivation to push them lower than where they stand today.