How will the elections impact mortgage rates and housing markets?

Question of the week:  What will happen to mortgages and real estate after the election?

 Answer:  The quadrennial question that has me grabbing the third rail of marketing, never discuss politics nor religion.

Disclaimer, I completely missed the answer to this question in October 2016. In the WR&MU I said that rates would be minimally impacted, rates climbed from 3.375% the week before the election to 4.00% in three weeks after the election. This was due to investors selling off bonds and mortgages to purchase equities causing stocks to soar.

As well, in October 2016 I indicated that whoever won the election they would have minimal impact on the economy that was headed to recession within four to six months after the inauguration. As you are aware, the economy continued to grow and add jobs until the Covid pandemic saw tens of millions of jobs lost and the economy dropping into recession for the first time since 2009.

So, you want to hear my thoughts again?

Quick background for those who have joined the WR&MU list since 2016. I have a Bachelor of Arts degree in Economics and Political Studies and have been active in continuing my education in both disciplines since receiving my degree in 1984. A bit of a news junkie and not afraid to be labeled an econ nerd, I have always read books, articles, columns, stories on economics and politics through history and modern times. Not trying suggest I am an expert; however, I have a pretty good breadth of knowledge of economics and politics and how they interact. Which enables me to be wrong about things but have sound reasoning for being wrong. I learned that in my economics 203 class when the professor taught about how to use “on the one hand…but on the other…” to hedge your bets when making predictions.

Interest rates and housing prices are primarily impacted by economic activity. Rates tend to increase during positive economic conditions and decline during negative economic conditions. The same is true of home prices and housing markets. At some point, a positive economy can result in rates that are high enough to choke of housing markets as rising prices and higher rates reduce affordability.

The question of the week is really, what impact with the election have on the economy?

Every four years the primary focus on election results is on the top of the ticket, who will be our President for the next four years. But equally important is down the ticket across the country and which party will control the Senate and which party will control the House of Representatives.

Since President Clintons first year in office, every President has had one year—their first year—with the majorities in both the House and Senate from his party.

For our election currently underway, the Democrats will most certainly retain the majority in the House; right now, there are 232 Democrat and the Republicans have197 Representatives. If the Republicans are able to gain 36 seats it will be the biggest possible surprise of the election.

In the Senate the Republicans have a majority by 53 seats to 45 for the Democrats, with two Independents who routinely vote with the Democrats. The Senate is in play and which way it goes will have a tremendous impact on expectations, depending on who wins the Presidency.

At the macro level there are two possibilities, if Biden wins and the Democrats flip the Senate majority the election results will fall in line with the last four Presidents having his party in the majority in both chambers of Congress. If either Trump wins or the Republicans retain the majority in the Senate, there will be at least one of the three branches in opposition and able to block legislation.

What do these possibilities mean for mortgage rates and housing markets?

Our Constitution purposefully established the checks and balances in the branches of government to prevent one party control. John Adams and James Madison, before they were Presidents, both cautioned about the “tyranny of the majority” to abuse the minority. These concerns resulted in our government being established as a republic and the bi-cameral legislature. Gridlock and stalemates are built into our Constitution, and investors tend to prefer them to one-party rule.

Generally, markets, meaning investors, prefer some form of gridlock and either the Executive, the Senate or the House in opposition to the other two. This is my preference as well.

If the Democrats win the White House and flip the Senate, investor and market reaction could be to be very cautious to take risks based on the comments and policies put forth during what I call the “rhetorical season,” also known as campaigning.

The expectations based on the campaign comments and statements is that should Biden have majorities in both houses that many of the regulations and policies put in place during Trump’s administration will be repealed and that the tax code revisions made in 2016 will also be repealed, pared back or otherwise changed. Essentially, in the view of the markets, turning federal policies away from what is considered to be a business friendly environment the last four years.

Should this action and reaction occur rates should remain low as investors retain their investments in safe holdings, such as bonds and mortgages, and the stability of housing markets will be determined by the overall economy and primarily jobs and wages.

The immediate aftermath of the election, in my opinion, will be a drop in equity markets, perhaps significantly. The reason I say this is because it is extremely likely that the results of the election will not be known for several weeks due to all the voting being done by mail and the number of states whose Constitutions prevent them from counting mail-in ballots until Election Day, or even after polls close. While the Presidential results may be known sooner, many House and Senate results may not be known for weeks, possible a month or longer. This is the type of chaos and uncertainty investors do not like and they will likely move out of equities to cash.

Mortgage rates are as low as they probably can go. Think about tying up your money for 30 years and have a rate of return less than 3% after fees are taken out along the way. Historically inflation is 3-4%, so for the majority of the time your money is invested you will be losing money to inflation. Regardless of the outcome in the elections there is greater opportunity for higher rates than lower rates.

There will be a lot of work to be done for whoever is inaugurated on January 20, 2011 to all the open seats in Washington. The period between the elections and the inauguration the President and opening of the 117th Congress will likely be very choppy and filled with uncertainty as results are tabulated and speculation abounds.

What happens after January 20th will determine the direction our political representatives want to control our economy through the powers they have for regulation and taxation. Reactions by investors and markets will show how they feel those policies and regulations will impact business, flow of funds and returns on investments—which will ultimately determine whether interest rates, and housing markets, go up or down.

Whoever wins and regardless of whether we have on party rule in Washington or a divided Executive and Congress, our economy will require careful consideration of governmental actions and their consequences as we try to rebuild following the damage caused by the pandemic shutdowns that have harmed small businesses and the entire entertainment and travel industries. Our economy is controlled by consumers, they account for 65-60% of our economy. A significant percentage of consumer spending is on services, which have been hard hit due to Covid-19. Long term our housing markets will depend on how well, and how quickly, these sectors can rebound in 2021.

Finally, key to the recovery and economic growth, even more important than who is sitting in the Oval Office and Congress, will be how quickly and widely a vaccine for C-19 is available. California, and several other states, appears to have shutdowns continue in many areas of the economy and public interaction until a vaccine is available—and possibly until a certain percentage of the population are inoculated.

Have a question? Ask me!

Consumer news positive, employment numbers not, were the take aways from this week’s economic data releases. Consumers pushed retail sales up for the fifth month in a row in September, with sales climbing 1.9% over August. The increase was led by more Americans dining out and getting to their favorite eateries in the new cars and trucks they purchased in September.

The increase in retail sales is positive news, but cautiously so as initial unemployment claims rose by 53,000 this week—a seven week high in new claims. The number is not fully accurate as to the number of filings as California has not updated its unemployment claims for three weeks due to a large backlog in cases, and duplicate and fraudulent claims. As well, California just started accepting new claims after a two-week period where it did not accept claims. The state has had about 30% of the total unemployment claims nationwide during the pandemic. Since California is also a major part of our nation’s GDP, and consumer spending, the lack of ability for unemployed workers to receive relief is putting increased pressure on the state’s economy.

Rates for Friday October 16, 2020: Rates dipped down as the week ended, moving for the first time in several weeks to match all-time lows first met in June. As you can see by the chart, rates have been in a tight 0.25% range for just over four months. It is a common belief that this is the bottom range as by the time mortgage payments flow through to investors the rate of return is about as low as investors will accept for tying up funds for a prolonged period.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                            2.625%   Down 0.125%

30 year high-balance conforming                 2.875%    Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Regarding party control in Washington D.C, and also state capitols, my desire is always for the parties to be divided between the Executive and Legislative branches, with neither party in control of both chambers and the Executive branch. I believe we need divide and opposition to temper the ambitions of politicians, to dampen the ability of the majority to tyrannize the minority. This leads to more stable economic conditions and enables a healthy housing market supported by stable employment markets. Essentially requiring both parties to move towards the center to find common ground to enact legislation.

Our 2020 election will reenact history from many decades ago when all ballots were hand counted and it would take weeks, months for results to be known. Unfortunately, unlike our ancestors, we as a society do not have the patience they had in waiting for results and communication. Our expectation is instant communication. Unfortunately, as any delays in results drag out the opportunity for unrest spurred on by social media and bad actors who desire chaos. I am sure I am not alone in hoping our nation is able to continue its life-long history of peace after elections, the exception being the election of 1860.

Stay calm, vote on.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog