The Fed announced on Nov. 7 that it was dropping rates by 0.25%, following the 0.5% (50 basis point) cut in September. Investors might hope that—with inflation under control—another rate cut could signal the start of a more affordable housing market. However, it’s not that simple.
The cut brings the federal funds rate—the interest rate banks charge each other for borrowing money—down to 4.5% to 4.75% from 4.75% to 5%. However, the most recent rate cut will not change things much for mortgage seekers and other borrowers.
“Once a few more cuts happen over the next few months, the impact will add up to something that moves the needle for the average person struggling with debt,” Matt Schulz, LendingTree chief credit analyst, told CBS News “For now, however, the effect of these cuts won’t be very noticeable.”
Don’t Rely on Lower Rates
Many potential homebuyers, sitting on the fence after the September cut and expecting further cuts and lower rates, were surprised when mortgage rates increased over the last month—with the average interest rate on a 30-year fixed-rate loan at about 6.79%, according to Freddie Mac. That’s up from a September low of 6.08% due to the effects of other economic trends, such as the unemployment rate and the presidential election, playing a role. Certainly, in the short term, it’s unlikely that homebuyers will see much of a drop in rates.
“As long as investors remain worried about what the future may bring, Treasury yields, and, by extension, mortgage rates, are going to have a tough time falling and staying down,” LendingTree’s senior economist Jacob Channel told CBS News.
The Election Result Changes Everything
One goal of increasing interest rates was to lower inflation and consumer prices. However, the effects of a Trump presidency could also mean less regulation and more tax incentives for real estate investors and builders.
“There’s likely to be two sides of the coin,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, a trade group, told MarketWatch. “Overnight [since the election result], we’ve seen the 10-year Treasury rate up about 20 basis points, so you could reasonably expect that it is going to translate pretty closely to a similar increase in mortgage rates.”
Fratantoni expects a Trump economy to see a higher growth economy, higher inflation, and, hence, higher interest rates.
Homeownership Might Be Tough for New Buyers
“We should expect more volatility in the housing market,” Lisa Sturtevant, chief economist at Bright MLS, said in a statement about the incoming administration. Over the longer term, she expects homeownership to be “harder to attain for first-time and moderate-income homebuyers, as his policies favor high-income individuals and existing homeowners.”
Sturtevant cautioned investors expecting the return of a low interest rate in 2025: “Bond yields are rising because investors expect Trump’s proposed fiscal policies to widen the federal deficit and reverse progress on inflation.”
Lawrence Yun, chief economist at the National Association of Realtors, told MarketWatch: “In the short term, mortgage rates will tick higher as the budget deficit outlook does not improve, even as the Fed is cutting its short-term interest rates.” Given the election results, Yun expected that the Fed would not make further rate cuts unless Trump’s economic and housing initiative decreased inflationary pressure. In short, don’t expect rates to come close to pandemic-era lows.
“You never say never, but the circumstances that would bring mortgage rates that low again are unhappy,” Fratantoni said. “We had to live through a pandemic to get there, so it would take a major economic crash or another downside … to get the benefit of very low mortgage rates.”
Less Regulation Could Make it Easier to Get a Loan
Despite uncertainty about interest rates, most experts agree that another Trump administration will see less regulation than the Biden administration. That extends to the lending industry, which could mean more approvals, building, and houses being sold, thus easing the market. However, those banking on an immediate change shouldn’t hold their breath.
Daryl Fairweather, chief economist at Redfin, told MarketWatch:
“Homes will still be in short supply. If the economy is growing, rents and home prices will grow too. The cost of borrowing isn’t likely to come down much. With Republicans in control, national housing affordability is not a top concern, so expect the status quo to continue.”
Final Thoughts
While the Fed tries to keep its distance from politics, Trump’s election win overshadows everything they are likely to do.
“The main takeaway is that his election injects a higher degree of uncertainty into the outlook, both for growth and for inflation,” Blerina Uruci, chief U.S. economist at T. Rowe Price, told the New York Times.
Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University, also told the New York Times: “There’s a widespread expectation that Trump is going to cut taxes, and that will add to the deficit and the debt of the country. This current move is reflecting the market’s best guess of what his policies will mean.”
With the recent election, no one has a clear indication of how the real estate market or interest rates, given inflation uncertainty, will fare over the next few months. For investors who are just looking at rate cuts to inform their decisions, the simple solution is, don’t.
One of the great things about real estate investing is that when done well, it succeeds despite government decisions and economic fluctuations, not because of them. Getting down to basic deal analysis is the key.
How much will a property cash flow after all expenses? If it does not cash flow enough, then don’t buy. There are still deals, motivated sellers willing to sell at a discount, and tenants willing to rent. Now more than ever is a time to analyze the numbers and exercise good judgment in buying deals that make sense for right now, instead of speculating about the future.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
