As of April 20, 2020, Quicken Loans® isn’t offering conventional adjustable rate mortgages (ARMs).
I don’t know if you’ve heard, but there’s a new person occupying the Oval Office. Donald Trump is being sworn in as president today. Whether you’re excited for America’s new president or unsure, chances are there will be changes in a variety of areas. Housing is no exception.
We sat down with Quicken Loans Chief Economist Bob Walters to discuss how the president’s economic policies could impact the housing market.
Where We Are Now
Mortgage interest rates are mostly impacted by movements in the bond market because mortgages are packaged into bonds and sold to investors. There’s no way to put this other than to say that both the stock and bond markets expected Hillary Clinton to win the election. When she didn’t, the markets had an initial drop, then stocks climbed and bonds dipped as traders tried to forecast what a Trump presidency would mean for businesses.
“Certainly, we’ve seen a big change right after the election,” Walters said. “The first two or three weeks after the election, (30-year) mortgage rates went up three quarters of a percentage point. They’ve tapered off since then. They actually have come back a little bit, and we find ourselves about a half a point higher than we were before the election.”
The bond market sold off when the stock market popped up because of optimism that the economy would get better. Walters pointed to an expansionary fiscal policy as a catalyst for this good feeling.
“Trump has said that he’s going to utilize fiscal spending more than we’ve seen in the past, meaning that he’s going to encourage the government to spend a lot more on infrastructure – and couple that with interest rates or monetary policy, and that will tend to lead to growth,” he said. “Higher growth environments often lead to rising prices, and when prices rise, inflation is increasing. Inflation is the enemy of low interest rates. Interest rates need to rise to accommodate any rise in inflation.”
Walters said the bond traders that control long-term rates, like those used for mortgages, are trying to make educated guesses about where the economy will be 10 or 15 years in the future, so some of these predictions of higher growth lead to higher rates.
The Federal Reserve has signaled that they expect inflation to continue by adding another interest rate increase to their 2017 projection dot plot – which shows the projections of members of the Federal Open Market Committee. Interest rates need to rise as inflation increases so that your money continues to hold the same value.
Still, it’s important to note that if short-term interest rates rise, long-term rates like those for mortgages don’t necessarily follow. The Fed controls short-term rates, while longer-term rates are affected by movements in the bond market.
What This Means for Housing
If you’re looking to buy a house or complete a refinance in the near future, what could this mean for you? Unfortunately, it’s hard to say.
“A lot of it depends how much (rates go up),” Walters said. “If interest rates go up slightly from here, I don’t think it dramatically changes consumers’ ability to own homes. If interest rates go up substantially, another four percentage points let’s say, that would start to have real impact on the cost of homeownership.”
One thing that might offset the effect of rising interest rates is the additional money in your savings account. There could also be an uptick in the value of some of your other assets.
“We’ve seen an increase in the stock market since the election, so it’s been beneficial for those of us who have 401(k)s or who own stock,” he said. “Generally, if inflation is rising, it can increase the price of assets. One of the biggest assets many of us own is a home, so that could be a positive effect if you see rising home prices.”
But there’s one piece of the housing affordability puzzle that has a huge impact on homeownership affordability but that we haven’t discussed yet: wages.
“If wages are rising fast enough to keep up with rising interest rates and home prices, the impact of these things is potentially minimized,” he said.
Finally, Walters said people might end up going with adjustable rate mortgages (ARMs), which have a fixed period at the beginning before adjusting annually, as opposed to fixed-rate mortgages. Fixed-rate loans are based on long-term rates, while adjustable rate loans are based on shorter-term rates. The difference between the two can be plotted on something called a yield curve.
“If it’s a steep curve, there’s a big difference between loans that have a fixed rate for three of four years and loans that are fixed for 30 years. If there’s not much of a difference, it’s a shallow yield curve. In recent years, we’ve had a shallow yield curve.”
Since the election, though, we’ve started to see the gap between fixed rates and short-term rates widen a bit, so it may make sense for more clients to take advantage of an ARM. This can be especially true when you consider that you can pick a period of time at the beginning of the ARM when the rate is fixed.
Walters said it makes a lot of sense to take advantage of an ARM when consumers think about how long they will have their mortgage before they move or refinance.
“Now we’re starting to see that yield curve steepen, and we’re seeing some benefit to taking advantage of the short-term fixed-portion of an adjustable rate mortgage,” he said. “Most people we know are not in their mortgage more than six or seven years.”
If you’re interested in buying a home or refinancing your current property, check out Rocket Mortgage® by Quicken Loans® or call (888) 728-4702. If you have any questions, leave them for us in the comments.
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