After the surprise election of President Trump, it was widely expected that the Trump Effect would drive mortgage rates higher. This has largely turned out to be true. In the past year and a half, mortgage rates have risen markedly. They went from the mid 3% range in early 2017 to almost 4.8% as of June 2108. This is not always the best news for people looking to get a mortgage. But it is not always a bad thing either.
First of all, rising interest rates generally signal a stronger economy as there is more economic activity. Home prices have been growing in the past year with approximately 7% growth per year. This is helping rates to go higher too. The higher mortgage rates have been good for people with investment accounts because stocks have risen in the same period.
Why Are Rates Higher Under President Trump?
Basic economics tells us that a stronger economy with higher wages and low unemployment leads to higher mortgage rates to lower inflation, which is a danger as an economy expands too quickly.
The funny thing was, when Trump won, the stock market futures actually dropped because there was uncertainty about what the Trump presidency would mean for the American and world economy. The uncertainty meant there was a stock sell off the next day, and that would translate into a lot of people buying bonds. Investors buy bonds when there think there is fear in the market. Bonds pay low rates and are dull but are reliable. If this had kept up, we would have started to see even lower mortgage rates than when had at the start of 2017. But that is not really what happened.
But now that President Trump has been in office for a year and a half we can see that he is definitely trying to encourage a stronger US economy with low unemployment, high growth, less regulation and lower taxes. This tends to encourage the real estate market and people want to buy homes. This drives demand for homes, prices rise and so do interest rates. If you wanted to get a 30-year mortgage under 3%, you have missed the boat because rates now are inching towards 5%.
Trump and Tax Cuts
Another major thing to keep in mind as you are looking at buying a home and interest rates is the Trump tax cuts that came into effect this year. It definitely has an effect on home owners and those buying a home. First it has doubled the standard deduction for single filers from $6350 to $12,000. The deduction for Married and Joint Filers went up from $12,700 to $24,000. It is believed that 94% of taxpayers will opt for the standard deduction. This means that owning a home and itemizing your deductions may not have the same appeal that it once did.
It is possible that with fewer people taking the mortgage interest deduction, it could lead to a reduction in home demand and prices. But this has not happened at this time as home prices have continued to grow higher this year.
Also important for home owners is the law cut the deduction for mortgage interest to the first $750,000 of the mortgage loan. Interest on home interest equity lines of credit are no longer able to be deducted. But current holders of these mortgages are not affected.
Taxpayers can take deductions up to $10,000 in local and state taxes. But they have to choose between property taxes and sales or income taxes. This does have a potential negative effect on states such as California and New York.
Generally, having President Trump in office seems to be largely a positive for the overall and housing economies. Unemployment is low, wages are rising, interest rates are rising, which indicates generally stronger housing demand and economic activity. Even the increasing gas prices can be seen by some as a sign of stronger economic activity.
As of today, the higher interest rates around 4.6% have not really slowed home buying. Perhaps people are continuing to buy as they want to avoid that 5% mortgage that some experts say is coming in 2019.