What will happen to mortgage rates next November?

If you want to buy a house in 2020, you should already be strategizing about how to lock the lowest interest rate.

Which might leave you wondering: How will the 2020 election impact mortgage rates?

After the 2016 election, they skyrocketed.

Average mortgage rates had been hovering around 3.6% in 2016. But they shot up to 4.2% between November and December.

Today’s rates are similarly low — resting at 3.73% at the time of this writing according to Freddie Mac.

But with a tossup election just over the horizon, they might not stay that way.

Find and lock your low rate now (Dec 18th, 2019)

Presidential elections and mortgage rates

Let’s go back to 2016 for a moment, to the last presidential election.

According to Freddie Mac, average mortgage rates went from 3.47% in October to 4.2% in December.

If you were a home buyer, refinancing, or had an adjustable-rate mortgage (ARM) that’s a massive jump.

The catch is that relating mortgage rates to presidential elections is hardly an apples-to-apples proposition.

• In 2012 rates essentially stood still. They were at 3.38% in October and 3.35% in December
• For 2008 the news was good. Rates went from 6.2% in October to 5.29% in December, a substantial drop
• In 2004 rates were largely unchanged. They stood at 5.72% in October and 5.75% in December

So, how can we predict what will happen after the next election?

Is there some reason to think that whoever wins the 2020 election can directly change mortgage rates one way or the other?

Interest rate predictions for 2020

Last year the typical 2019 mortgage rate forecast said interest rates would soar, going well above 5.5%.

What actually happened was the reverse: Weekly rates at the start of December were at 3.68%, down from 4.75% a year ago.

The predictions today say that 2020 mortgage rates will be well below 4%.

The Mortgage Bankers Association says rates will be at the 3.7% mark throughout the year. And Freddie Mac is forecasting 3.8% next year, while Fannie Mae says quarterly rates should vary between 3.5% and 3.6% during 2020.

However, the 2020 election winners can substantially impact mortgage rates, depending on what actions they take.

• Businesses across the country could be hurt by a trade war with China, Mexico, France, or Europe
• Escalating tensions with North Korea could push interest rates higher as investors worry about additional risk
• New tax policies could impact economic activity. As an example, the $10,000 limit on state and local taxes established under the 2017 tax reform legislation has hurt high-tax states such as New York and California

In short, it’s hard to say exactly how a new president will move the needle on interest rates.

So those that can take advantage of low rates now, should.

Find and lock your low rate now (Dec 18th, 2019)

Who — or what — sets mortgage rates?

No one — not the President, the Congress, or the Federal Reserve — sets mortgage rates.

Rates rise and fall with the push and pull of the financial markets. Not just markets within our borders but markets worldwide.

That’s because money moves with electronic speed to the places and investments that money managers hope will produce the best combination of risk and reward.

>> Related: How Fannie Mae, Freddie Mac, and the mortgage market work

Leading up to the 2020 election cycle, interest rates are remarkably low.

The Visual Capitalist has looked at interest levels during the past seven centuries — really, seven centuries! — and found that today’s rates are “at 670-year lows.”

That might sound great for borrowers, but ultra-low interest rates can be a worrisome sign.

Borrowers are simply not competing for cash the way they once did. There’s not much pressure to push up rates.

Worldwide, says Bloomberg News, $15 trillion is invested with negative interest rates — rates below zero.

Not many people or companies want cash to create new factories, technologies, or jobs. Worse, big investors are actually paying banks and other institutions to hold their cash.

In other words: The signs of economic improvement that many are hoping for, would actually push interest rates in the wrong direction (up).

What to pay attention to in 2020

Federal debt and mortgage rates

The president doesn’t control mortgage rates. But the 2020 election still impact interest rates.

The federal government’s public debt now exceeds $23 trillion — and is rising. So much debt creates big interest payments.

In fiscal year 2019, the period that ended September 30th, the government paid $575 billion in interest, up from $523 billion the year before.

And when the government borrows, it’s competing with the private sector for cash.

Increased demand on a massive scale should force up interest rates, including mortgage rates. And yet that hasn’t been happening. There’s just too much cash and too little demand.

Thus, the 2020 election winner will face tough choices.

• Do the next election victors cut federal spending to reduce the deficit? If so, what programs will be cut?
• Will they increase the deficit with greater federal spending?
• Will more federal spending set off a difficult round of inflation?
• Do the 2020 election winners raise taxes to cut the debt? Which taxes?

Each choice will have far-reaching implications.

Meanwhile, if rates go up just a little, federal interest costs will soar.

A 1% rate increase can mean hundreds of billions of dollars in higher federal interest payments.

FHA insurance costs and the 2020 election

The FHA mortgage program is a huge success. It’s collecting big money from insurance premiums at a time when there are few foreclosures. The result is a massive surplus.

So, where does money generated from FHA loans come from — and where does it go?

In short, the FHA insures mortgage loans. This insurance allows borrowers to purchase with as little as 3.5% down. Borrowers pay insurance premiums to get FHA backing. And the insurance premiums collected by the FHA go into a reserve account.

The FHA is supposed to have a 2% reserve. In fact, the reserve is now equal to 4.84% of all potential insurance claims.

So, what will the next election winners do about the FHA surplus? Keep collecting the money, or reduce FHA insurance premiums?

The current administration says it won’t change FHA mortgage insurance rates. But under a different president, that could change.

Lower premiums would allow more people to buy homes, something that can spark increased real estate sales nationwide.

The Federal Reserve and mortgage rates

The Federal Reserve is an independent institution charged with guiding the nation’s economy.

So far in 2019, the Federal Reserve has cut the federal funds rate — the money banks pay for overnight borrowing — three times.

Mortgage rates are not controlled by the Federal Funds Rate. But a low-rate environment has certainly contributed to keeping mortgage rates low.

And some argue that President Trump has played a role in pushing rates down this year.

In fact, a recent study directly linked Trump tweets to a significant drop in the Federal Funds rate.

If a new president is elected will he or she cajole the Fed into changing its policies? Will the Fed respond?

Recession or inflation

A major Fed job is assuring that inflation stays within certain bounds.

It’s generally agreed that 2% inflation is good for the economy.

The big question is whether the Fed is setting the right policy. The 2020 election winners might agree or disagree with Fed policies.

Everyone has some big questions to consider.

• If the Fed reduces bank rates will the economy speed up?
• Will we see a bout of inflation that raises interest rates?
• Or, if the Fed raises bank rates will the economy slow, giving us fewer home sales and less borrowing?

Despite the Federal Reserve being an “independent” body, there’s some evidence to suggest its policies aren’t completely free from political sway.

What it all means for you

Predicting what will happen to mortgage rates in 2020 involves a whole lot of “ifs” and “maybes.”

And as history has shown, presidential elections can impact mortgage rates positively, negatively — or not at all.

So what should you do if you want to buy in 2020?

Stay on top of the market. Mortgage rates change on a daily basis. So when you’re close to closing, keep your eyes on daily rates — and be ready to lock when they’re in your favor.

Verify your new rate (Dec 18th, 2019)