A week following the election, mortgage rates soared sharply.
It is believed that the housing rates will get even higher in 2017. It’s because the housing rate is closely tied to the stock market. When there is an inflation in the stock market, the mortgage rates also goes up. And we all know that there is an inflation in the stock market since the real estate mogul Trump won the Presidential election.
Mortgage interest rates are influenced primarily by the public markets. Now, if these markets predict that the economy is slowing, the interest rate may fall. This is because it’s projected that the Federal Reserve might lower short-term mortgage rates which affect the bond market.
Fannie Mae and Freddie Mac are two giant investors. And a lot of mortgages are sold to either one of them. The mortgages are pooled into Mortgage Backed Security (MBS). These bonds are being bought and sold. However, the price of the bond goes down if there is a pressure in selling them.
Mortgage rates are directly connected to the value of MBS because it’s an indicative of what can be sold for the day. And so lenders are always keeping an eye at the price of MBS on a daily basis for them to arrange their daily rates. The MBS market is also the determining factor to see if they should be issuing a revised rate sheet for any changes to MBS price. To understand better, the movement of MBS market comes to about 10-25 (up or down) basis points per day. 1 basis point is valued at 1 cent per $100 of bond value. If for example the price of the MBS is up by 25 basis points, the mortgage rate goes down by about 1/16 %. MBS is highly sensitive to inflammation because they are fixed income investments.
MBS lost 66 basis points on Wednesday after the election and also lost 43 basis points on the first Monday after the presidential election. The selling continues but the overall lost was 232 basis points which meant the mortgage interest rate rose rapidly by about .75%
The reason behind the increase of mortgage interest rates
It appeared as though the bond market reacted excessively with the results of the election. And so they have obviously oversold. As of this writing, they are recovering and we are now expecting lower rates the coming weeks.
Donald Trump’s economic policies like the tax cuts, spending for infrastructure and other plans for which he would add Trillions to the debt in matter of times may have also contributed with the sudden increase of the interest rates.