When the preliminary tally of the Electoral College was announced at about 3 a.m. November 9, 2016, many were surprised to learn that the U.S. President-elect was businessman and real estate developer Donald J. Trump. Based on news accounts, it is safe to say most business leaders – including bankers, CEO’S and even members of the Federal Reserve – did not see this coming. A Clinton victory had been “baked in” to most of the economic projections, including those related to mortgage rates in the coming months. Clearly, it’s time to “re-bake” that cake.
After the dust settled and the head scratching subsided, financial experts, lenders, banking consultants and business media began doing what they do best – speculating on what a Trump administration will mean to the housing market in general and to Denver and the state of Colorado specifically. To the surprise of no one, there are many differing opinions.
For starters, the state of Colorado remained a “blue” state on Election Day by giving Hillary Clinton 48.1 percent, Trump 43.3 percent and Libertarian Gary Johnson 5.1 percent of the vote. Many financial experts believe this result – voting Democratic – will have an effect on the home buying trends in the state and especially metro Denver. (Analysis of this theory is found below.)
Chad Corcoran, district sales manager for Acme Brick in Castle Rock offered his opinion on this state of affairs. “No matter what happens to mortgage rates and despite the current run-up, we have not seen mortgage rates this low in generations! It’s still a great time to be building a new home.”
With all this uncertainty, a brief primer on mortgage rates might help home buyers – especially Millennials, who are typically first-time buyers – understand what is likely to happen and what strategy might work best.
What About Mortgage Rates?
Mortgage rates have spiked since Trump became President-elect. In a post-election article, Forbes magazine noted, “Mortgage rates have already begun rising post-election. The interest rate on a 30-year fixed mortgage has soared to 4% from as low as 3.34% in the past 12 months. Expect a rocky rate road at least until inauguration day.”
But let's put that in perspective: "Even at 4% or even 4½ percent," Chad said, "Mortgage rates are still at historic lows. A generation ago, many homebuyers considered themselves lucky to get an interest rate of 10%.
“Homebuyers who are ready to act can feel confident that mortgage money will remain affordable.”
So what's driving this recent run-up? Experts point to two factors: short-term economic uncertainty and medium- to long-term economic growth.
As Forbes reports, “Investors are responding to new uncertainty by pulling their money out of U.S. Treasury Bonds, which serve as a benchmark for mortgage rates, in favor of Japanese and European bonds. Investors are also betting that President-elect Trump’s proposed economic policies, such as ramping up infrastructure spending and slashing corporate and personal income taxes will encourage prices and a rise in inflation.
However, for all the talk about the Federal Reserve and its interest rate debates, there really isn't a direct link between Fed policy and mortgage interest. As The Mortgage Report, a knowledgeable media source for the real estate and finance industry notes, “U.S. mortgage rates aren't set or established by the Federal Reserve or any of its members. The Fed doesn't make mortgage rates. Mortgage rates are made on Wall Street.”
The State of Mind of Home Buyers in Denver
Most residential real estate brokers will confirm that psychology plays an important role in home buying. Ralph McLaughlin, who is the chief economist at Trulia, a residential real estate tracking site, made an interesting point in an interview with The Washington Post.
“What effect a Trump victory has on the housing market may vary depending on where you live,” McLaughlin says. “Because home buyers in economically healthy blue states are more likely to be rattled by the election outcome and concerned about the future of the economy, they might put off making a large purchase such as a home, causing a drag on the market.” This does not bode well for home sales in Colorado – still very much a blue state.
“In contrast, home buyers in economically stagnant red states are more apt to be optimistic about a Trump administration’s effect on their economic prospects, creating a surge in their confidence about the future and interest in making a big purchase such as a home.”
First Time Buyers: Is it a Good Time to Buy a Home in Denver?
It’s been said that “the market hates uncertainty.” While this phrase is referring to the stock market, first time home buyers can identify with this sentiment. There is no question that a victory by President-elect Trump is fraught with many unanswered questions, including those related to the general economy and specifically to mortgage rates.
“No one has a crystal ball on this situation, “Chad noted. “This uncertainty about the economy in general and mortgage rates in particular, will have many home buyers waiting to see what might happen next. Unfortunately, if they wait too long, there is a chance the housing market will pass them by.
“Even though the experts have differing opinions on almost every factor affecting the housing market, they all pretty much agree on one thing,” he said. “Mortgage rates are not going any lower anytime soon. The rates may be higher than they were last month, but they are very likely to be higher next month. In terms of timing, this is absolutely the right time to be building a new home.
“I would prefer it be a brick home,” he smiled. “But I’m biased in that regard because brick homes hold their value longer than other types of construction.”
“Besides the mortgage rates, there are other factors to consider,” Chad said. “Every indication suggests that President-elect Trump will commit substantial resources to rebuilding infrastructure and this will put many people to work. These wages, combined with the Fed’s likelihood of increasing the lending rate among banks, will increase inflation and this will increase the price of homes. Again, this suggests that now is the best time to buy a new home.
“Plus, all those workers in the building trades will likely be busy on infrastructure, putting more demand on the already stained construction workforce. This will drive the price of new homes up even further. For all these reasons, now is definitely the time to build a new brick home.” he concluded.