The Election and Mortgage Interest Rates

I’m going to try my best and give you an unbiased explanation of what to expect depending on who wins the election next week.  To understand each candidate’s effect on mortgage interest rates, I believe it important to start with a refresher on how mortgage rates are determined.

 

After your lender funds your mortgage, that mortgage and note are considered an asset.  That asset has value.  That value is not just the amount you owe, but since you’ll be paying interest on that note, that additional income adds value to the paper it represents.  Your lender will in most cases sell that mortgage and note to Fannie Mae or Freddie Mac – the government regulated clearinghouse for mortgage debt.  Your mortgage gets pooled with other loans and gets converted to a bond known as Mortgage-Backed Securities.  That bond can now be sold on the open market to investors.

 

The price investors pay to purchase those bonds is no different than how a stock price is set on one of the US stock markets.  Ignoring external factors for a moment, it all comes down to the law of supply and demand.  Yes, there are multitudes of other factors that go into the decision to buy or sell, but regardless of those factors, ultimately, the price paid is based on supply and demand.

 

Stocks and bonds react the same way to those demands to buy or sell, but there’s something specific to bonds I’ll explain that is opposite.  Once you get the concept, it will be easy to understand.  For stocks, if investors desire to buy a stock, and there’s more buyers than those willing to sell, the price will go up.  If there are more sellers than buyers, the price goes down.  Bonds work the same way, but here’s the difference.  If more investors want to buy bonds than sellers, the price will go up, just like stocks – except, as the price of a bond goes up, the interest rate associated with that bond drops.

 

Think of what I just explained about bonds this way.  The more demand there is for a bond, the seller doesn’t need to offer the buyer as high an interest rate.  If sellers are looking for investors to buy bonds, they’ll have to offer higher interest rates to entice buyers.

 

If the US, as a country, prints more dollars because of increased government spending, we’ll have more dollars in the money supply.  That will reduce the value of all the remaining dollars already out there.  Also, to have the extra money to spend, the government must sell more bonds.  This pushes greater supply into the marketplace, resulting in higher rates.

 

Inflation will also erode the value of the dollars in the economy and bonds held by investors.  For an investor to buy a long-term bond, they need to forecast the long-term effects of government spending and inflation, because as time goes on, that bond’s underlying value will decline.

 

Investors buy bonds to balance their portfolios with the stocks they own, plus the cash they have on hand.  If they sense the stock market is on a run higher, they’ll shift to stocks.  If the stock market starts faltering, they’ll shift to bonds to protect their investment.  To delve deeper than this would require a semester course, not a weekend newsletter.  Let’s simplify by saying investors balance economic growth against the effects of inflation.

 

Now that we have a general understanding of a bond buyer’s playbook, let’s honestly compare what each candidate has pledged, and how that will affect the economy.

 

Kamala Harris’ approach is very much in line with the Keynesian view of economics.  Keynesian economics is a macroeconomic theory that focuses on the idea that government intervention can stabilize the economy.  It's named after British economist John Maynard Keynes (1883–1946), who developed the theory in the 1930s to address the Great Depression.  In its simplest form, Keynesian economics allows governments to spend without regard to national debt to bolster the economy.  That is why Harris has promoted tax breaks and subsidies as her plan to invigorate the economy.

 

Donald Trump’s plan is based on supply-side economics.  Supply-side economics is a macroeconomic theory postulating that economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade.  Supply-side fiscal policies are designed to increase aggregate supply, as opposed to aggregate demand, thereby expanding output and employment while lowering prices.  Trump promises to cut taxes and cut government spending to fix our economic woes.

 

 

 

Eliminating deficit spending and reducing our national debt is the only way we can right our economic ship.   Neither Trump nor Harris has good track records with restrained government spending.  During Trump’s tenure as President, we saw spending and our national debt soar.  Trump started his presidency with $19.9 trillion in debt.  When he left the debt was $27.7 trillion.  The Biden-Harris administration continued that trend.  They started with $27.7 trillion, and now the US national debt is over $35 trillion.  Our national debt has increased $16 trillion in 8 short years.  That’s just $3 trillion less than all the debt accumulated prior to 2017.  Or you can say it has almost doubled in that time frame.

 

The key to lower mortgage rates is reducing the money supply by reducing federal spending and bringing inflation down.  Harris has not addressed cutting government spending.  Trump has claimed that Elon Musk will identify and recommend eliminating $2 trillion in wasteful spending.  Going on just what they have promised, Trump would be the path to lower mortgage interest rates.  BUT, as I noted earlier, his track record on restrained spending is not spectacular.

 

We as a country cannot sustain the pace of spending our government is on.  Putting social issues aside, our debt and spending should be the #1 issue.  Neither candidate has addressed the issue sufficiently.

 

 

 

 

On a Personal Note – Blame the Media

I am so happy we are just a couple of days away from election day.  I’m mentally exhausted!  It’s hard to believe that we’ve endured two years of campaigning.  What used to be a joyous time of civic responsibility to vote has turned into arguments within families and with friends over one’s preferred candidate.

 

The interaction we had with each other was never this volatile.  We as a people haven’t changed.  But what has changed is the media.  As our ability to access information has exploded, media companies are in the fight for their lives to remain not only relevant, but profitable.  With so many choices of where to get information, many in the media have decided to no longer report, but instead lie and sensationalize.

 

We as a society seem busier today than ever.  It seems like the pace of life has been turned up to “11”.  And with our faster paced lives, our patience and attention spans have decreased.  Nobody reads newspapers any longer.  Most people under 30 get their news from Tik Tok.

 

The media has capitalized on our busy lives to make a buck.  Their partisan sensational reporting has conjured the worst in us.  How else is a responsible person supposed to act when the opposing candidate will end the world as we see it?

 

Regardless of who wins on Tuesday, let’s remember that there’s more that’s binding us than dividing us.  And no matter who wins, the media coverage will probably get worse.  We all need to live together as Americans.  Recognize the motives behind what the media is feeding us.  And for the benefit of all of us, let’s try and come together as one people.

 

 

 

 

 

And now the week’s economic news…….

 

Job Gains Tumble

During a week packed with major economic reports, mortgage markets exhibited the anticipated volatility.  What was somewhat surprising, though, was that the price movements were almost completely offsetting, and mortgage rates ended the week just slightly higher.

 

With major distortions from two hurricanes and a large Boeing strike, forecasts varied widely for the key Employment report, but the latest figures still fell far short of expectations.  The economy added just 12,000 jobs in October, well below the consensus forecast of 100,000 and the smallest monthly increase since December 2020 – during the COVID epidemic.  In addition, the results for prior months were revised lower by 112,000.  The unemployment rate remained flat at 4.1%, as expected.  Average hourly earnings, an indicator of wage growth, were 4.0% higher than a year ago, also matching expectations.

Another significant economic report released this week from the Institute of Supply Management also indicated unexpected weakness.  The ISM national manufacturing index dropped to 46.5, below the consensus forecast of 47.5 and the lowest level since June 2023.  Since readings above 50 indicate an expansion in the sector and below 50 a contraction, the report suggests that this important segment of the economy is slowing.

 

Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator.  In September, core PCE, which excludes food and energy to reduce short-term volatility, rose 0.3% from August, matching expectations.  Notably, services prices increased 0.3% from August, while goods prices declined 0.1%.  Core PCE was 2.7% higher than a year ago, the same annual rate of increase as last month.  While far below its recent peak, further progress toward the 2.0% target of the Fed remains challenging, and this desired level has not been achieved since February 2021.

 

Gross Domestic Product (GDP) is the broadest measure of economic activity.  During the third quarter of 2024, U.S. GDP rose at an annualized rate of 2.8%, modestly below the consensus forecast of 3.0% and down from 3.0% during the second quarter.  Consumer spending and government spending were two of the biggest contributors to the growth during the quarter.

 

 

 

 

 

Next Week

The election results potentially will be one major market moving event next week. In addition, the next Fed meeting will take place on Thursday (a day later than usual due to the election). Most investors anticipate a 25 basis point rate cut and will be looking for officials to elaborate on their plans for future monetary policy. For economic reports, the most significant will be the ISM national services sector index on Tuesday.

 

 

 

 

Until next week…….