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Key Points
Mortgage rates have started to decline even before the anticipated Federal Reserve Board meeting next week. The future direction of these rates hinges significantly on the upcoming presidential election.
While presidents don’t wield dictatorial power, their policies can substantially impact economic factors that influence interest rates.
The Current Landscape of Mortgage Rates
With the Federal Reserve Board poised to lower the federal funds rate next week, there’s a collective sigh of relief as rates appear to be on a downward trajectory. However, interest rates are all about balance. As the federal funds rate shifts, the pressing question becomes: where are mortgage interest rates headed?
Understanding Mortgage Interest Rates and the Federal Funds Rate
The federal funds rate is the interest rate at which banks lend money to one another, not the rate offered to consumers. Typically, credit card and mortgage interest rates surpass the federal funds rate because banks need to generate profits. Although mortgage rates aren’t directly tied to the federal funds rate, they often follow a similar trend, albeit with varying spreads. When the federal funds rate drops, mortgage rates generally follow suit.
Key indicators influencing changes in the federal funds rate include unemployment and inflation rates. The Fed manipulates the federal funds rate to impact these economic metrics. The long-term inflation target is approximately 2% on average, while unemployment aims to be as low as possible, contingent on economic conditions.
Projecting Mortgage Rates in 2025
In August 2024, the unemployment rate stood at a historically low 4.2%, while the inflation rate for the 12 months ending August 2024 was 2.5%, down from 2.9% the previous month and 3.2% for the year ending July 2024. Given these figures, one might assume mortgage interest rates are unlikely to rise. However, the reality is more complex, potentially posing nightmares for mortgage lenders.
As 2024 is an election year, the outcome will significantly influence mortgage rates. As of September 12, 2024, polls indicate a tight race between Harris and Trump. While numerous factors can affect unemployment and inflation, administrative policies are pivotal. Candidates often promise more than they can achieve, given the need for Congressional cooperation, but some issues could impact the federal funds rate over time.
Harris’s Potential Impact
Harris’s policies are expected to largely continue those of the Biden administration. However, some proposals could spur inflation. For instance, a first-time home buyer tax credit, if poorly timed and widely adopted, might elevate housing prices as demand increases without a corresponding rise in supply. Policies encouraging development must precede such measures to prevent housing inflation.
Harris’s proposed child tax credit could also affect inflation. While beneficial for parents, more disposable income may lead to increased spending, potentially driving inflation if businesses attempt to capitalize on the extra consumer funds. These influences are minor and manageable.
Trump’s Potential Impact
Trump’s policies generally tend to be inflationary, with proposed import tariffs and aggressive deportation plans. High tariffs result in increased goods costs domestically, not abroad. For example, a 60% increase in the cost of Chinese goods would be borne by U.S. consumers, directly boosting inflation.
Mass deportations could exacerbate this. Many farm and construction jobs are filled by immigrants with uncertain legal status, often accepting below-market wages. Removing 8.3 million undocumented workers could echo the labor shortages seen during COVID-19, driving up wages and inflation as businesses struggle to fill positions. Industries like agriculture and construction, where a significant portion of workers are undocumented, could face severe disruptions.
The Uncertain Future of Mortgage Rates
Until the next president is decided, predicting future mortgage rates remains speculative. Current data suggests a potential decline in mortgage rates under Harris and an increase under Trump. This assessment is based on publicly available data, not personal bias.
Ultimately, the direction of mortgage rates in 2025 will be influenced by voter decisions on Election Day. Your participation matters.
