- The bond market yesterday was splattered all over the windshield, taking mortgage rates up with it.
- Once you have destabilized the bond market, re-stabilization takes time. Often a long time.
This week’s election surprise has unpleasant consequences for mortgages and housing. Immediately, as in today. And in the longer term, possibly severe ones.
That said, fears of the Trump Presidency are likely to be either overdone or misplaced.
Most urgent: The bond market yesterday was splattered all over the windshield, taking mortgage rates up with it. The 10-year T-note has ballooned to 2.07 percent, the first time so high since last January and wiping out six months of chart support near 1.80 percent — and the next support is near 2.50 percent, mortgages 4.25 percent-4.50 percent.
“Mortgage rates have spiked more than 20 basis points following the results of the presidential election on Tuesday, as we assess the degree of political and economic uncertainty that Trump’s win introduced to the market and as investors move away from U.S government assets, including U.S. mortgage-backed securities, in favor of relatively safer investments,” said Erin Lantz, Zillow Group vice president of mortgages, in a statement.
“As we continue to learn more about shape of the new administration, their policies, and the global reaction, we expect more volatility as markets try to put a price on the political developments.”
Mortgages after a bad day are still below 4.00 percent: In a bizarre technical note, after any initial upward surge of rates, mortgages gain investment value because of reduced fear that borrowers will refinance. Another note: Because of its survey reporting lag, Freddie Mac and the general media will not discover rising rates until next Thursday.
The stock market is momentarily happy, but there is no accounting for the behavior of drunks. Why have bonds been blasted?
Mr. Trump on campaign promised huge tax cuts to stimulate the economy, which would expand tax revenue and limit the resulting deficit. The last time we tried that was in 1981, and one result was 18.00 percent mortgage rates. Fortunately someone soon will explain to him that because of rising entitlement spending, there is no room for any tax cuts.
The second shock to bonds: On campaign, Mr. Trump repeatedly accused the Federal Reserve Chair of holding interest rates low for the benefit of Hillary Clinton.
Janet Yellen’s term as Chair is up in one year. The Fed is the protector of the bond market — by limiting inflation. No president should muscle the Fed, in public or private. All attempts end badly.
Once you have destabilized the bond market, re-stabilization takes time. Often a long time.
Who will we get as the next Fed Chair? And with what set of policy? If it’s a right-side hard-head who is going to raise rates (until the recession) and never again engage in quantitative easing, sell. If it’s someone who will accommodate your new and enormous deficits, sell. Today, there is only one option for traders.
A few weeks or months ahead, the worst possible hazard to housing: right-side rockheads will try to shut or to privatize Fannie and Freddie. After a period of chaos with interrupted mortgage supply, credit could be restored but at rates 1.50 percent to 2.00 percent higher than today. As high as 6.00 percent, maybe.
After that chilling thought, some reassurance.
Our government is based on winner-take-all voting, which heavily favors a two-party system.
However, a majority party can function only with party discipline. Republicans in Congress today are bitterly divided between the Tea Pots and the Traditionals.
Eighteen months ago they were barely able to elect a Speaker of the House; Mr. Ryan’s future is in serious doubt and there is no apparent alternate. These are the same people who for 20 years have tried to shut down the government to prevent any increase in deficit — and they are going to vote for Mr. Trump’s?
The Republicans now control the White House, too, except that the President-elect is not a Republican. Not like any in Congress. Fatal for party discipline: Not one member of Congress owes her or his seat to Mr. Trump. In fact, Mr. Trump made their elections absolute misery.
More: Every member of Congress expects to be in office longer than Mr. Trump. He’ll be inaugurated at age seventy-and-a-half, and with poor prospects for a re-election campaign at 75. Ron Reagan was six months younger, and the only age-bracket predecessor by a mile. Mr. Trump is a lame duck today.
The Republican majority does have chances at useful reform of taxes, entitlements and health care. Please press on with that!
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at firstname.lastname@example.org.