Will the Election Affect Mortgage Rates?
As much as economists say that this upcoming election will not affect mortgage rates, the real answer is – heck yes - its very likely it will for a variety of reasons (and likely not the ones you are thinking of).
And it’s not that if Biden wins that (long term) mortgage rates will go lower and if Trump wins, mortgage rates go higher (or vice versa). Neither President has the magic wand, nor the power to walk over to the Federal Reserve and tell them that the new policy is to lower the Federal Funds rate and that the treasury bonds need to be paying out a lower rate of return (the treasury market has a HUGE influence on mortgage rates).
Think about it this way, its sorta the same vein that a President has influence over individual Supreme Court cases. They obviously can’t tell a Supreme Court Justice on how to make a ruling, but the President can control who is put into a vacant seat. Same idea exists with the Board of Governors at the Federal Reserve.
As we know from elementary school (and from the School House Rock songs played on NBC Saturday morning cartoons) – we know there are 3 branches of government: Executive, Judicial, and Legislative. The executive branch (the President) selects Supreme Court nominees to be affirmed by the legislative branch (the Senate). If no Supreme Court Justices pass away or retire during that specific President’s term, they don’t get to select any nominees. For example, Trump appointed 3 of the Supreme Court justices, while Biden has only appointed one. There are currently 6 Republican appointed Supreme Court Justices and 3 Democratic appointed Supreme Court justices, even though over the last 24 years office has been held equally 12 years by a Republican President and Democrat President.
Now let’s jump to the Federal Reserve. Like a Supreme Court Justice, the president does nominate a Board of Governors (there are 7 of them) and then confirmed by the Senate. UNLIKE the Supreme Court, the Board of Governors are not given a lifetime appointment. They are only given 14-year terms and then their terms come open as they stagger over time equally. As such, the next President will be able to nominate 2 additional Board of Governors.
As you know the Chairman of the Board of Governors at the Federal Reserve is Jerome Powell. He was originally appointed by Barack Obama, elevated to Chairman by Donald Trump, and reaffirmed as Chairman by Joe Biden. As you can tell, the Federal Reserve doesn’t travel exclusively along party lines like the Supreme Court (who interpret the law either from a liberal or conservative lens) does. It’s simply not as cut and dry in economics. That said, the free trading markets (the secondary treasury and mortgage-backed security bonds market) do seem to fluctuate based upon the election in certain situations; let’s look back at each election going back to 2000:
1) Biden beats Trump 2020. Mortgage rates went up by less than three 100th’s of 1 percent. There wasn’t much movement because it’s likely that the market figured Powell would remain as Chairman since he was originally appointed by Obama - and Trump kept him as chairman during his Presidency. Stability in the Federal Reserve would remain regardless of who won this election.
2) Trump defeats Hillary Clinton 2016. Mortgage rates jumped nearly half a percent. Markets don’t like uncertainty, and uncertainty in the economic world is displayed as ‘risk’ - which translates into higher rates. If you remember, going into that election – even Hillary Clinton was even shocked at the outcome. She didn’t see it coming – and likely the secondary bond markets didn’t see it either. Added uncertainty means higher rates in the consumer market.
3) Obama wins re-election in 2012. Mortgage rates declined only 4 100th’s of one percent. The reason? The same as why there WAS movement in Trumps first election. Markets don’t like uncertainty. Because Obama was re-elected, the markets already knew the economic policy that was coming.
4) Obama defeats McCain in 2008. Mortgage rates DECLINED by almost a full percentage point. This decline wasn’t due to Obama taking office – rather likely due to the economic policies that were currently in place during the economic recession of 2008/09 (rates historically come down on the back side of recessions, as the Federal Reserve loosens up its money belt).
5) Bush wins re-election in 2004. See what was said in #3. ???? Mortgage rates moved upwards only two 100ths of one percent.
6) Bush wins election over Al Gore. This is actually an interesting tale to tell. Rates went up a smidge the week before the November 7th election – likely because of the doubt of who would win. If you recall, the election went to the Supreme Court over the results seen in Florida. Once that settled on December 13th, we saw rates come back down from their elevated levels – presumably because certainty re-entered the markets with a victor.
Based on the elections going back to 2000, you can see the potential set up here for the election. The markets love information. If they know in advance who the likely winner of the presidential election would be – the rates reflect that information well in advance. Volatility (risk) enters rates when it’s unknown what the likely outcome will be. Presently, this election is too close to call. As we get closer to election day, if it remains hesitant who the likely winner is likely to be, it’s probable we’ll see rates increase starting in the week or two before to election day.
Post election, my forecast is that if Biden is re-elected, you’ll likely see minimal movement in mortgage rates immediately after the election. If Trump is elected, and his new economic policies are not yet known – its VERY likely that we’ll see a sharp increase in rates. Not because his economic policy is bad (please argue that one way or another outside and away of this article) but because there is uncertainty around what his economic policies will be.
In addition, Jerome Powell’s term will be up in January of 2028 (he can’t be reappointed) – so Trump would be both replacing Powell as a member of Board of Governors on the Federal Reserve AND selecting a new Chairman from the 7 Board of Governors that are currently serving.
You might see other articles out there that say that elections don’t influence mortgage rates. As you can tell, I believe otherwise. There is always a ‘why’ behind rate fluctuations. You just have to be willing to investigate and look for clues!
Thanks for reading, and remember the forecasts in this article are my own, and don't reflect that of C2 Financial Group. When investing, always speak to a Financial Advisor. There are 26 super computers that predict the weather. Just imagine how many there are out there for financial forecasting! And even then we don't always get it right!
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