Interest on mortgages is a rather complex subject.
They are also commonly misunderstood and oversimplified, with many myths perpetuated by those working in the industry.
Some people believe that when the Fed lowers interest rates, mortgage rates fall by the same amount.
Others might think that the government somehow sets the rates and then lenders offer them accordingly.
The thing is, none of this is true. At the end of the day, mortgage rates are set by the market, just like many other things you buy.
Does the president set interest on mortgages?
The short answer is no.
When it comes to interest on mortgages, there is a supply and demand dynamic just like any other commodity.
Driving this mortgage pricing is investor appetite for mortgage-backed securities (MBS), which are bonds made up of bundles of home loans.
Simply put, if there is more investor demand for these bonds, MBS prices rise and mortgage rates may fall.
If there is not much demand for MBS, prices must fall and interest rates must rise to attract more purchases from investors.
It all speaks for itself market determine the direction of rates, not a politician or any other person.
So where does the President of the United States fit into all this?
Well, you could argue that the president definitely plays an indirect role in where interest rates go because they are driven by the economy.
However, there is not a direct order from President Biden or President Trump saying that the rates must be X, so they are set at X.
Instead, these presidents can set policies that directly affect the economy and thus indirectly affect interest rates.
Trump said he wants lower mortgage rates, but his policies could have the opposite effect
Indeed, some economists have expressed concern recently that some of President-elect Trump’s proposed policies will increase inflation.
Things like tariffs and tax breaks can turn out to be inflationary and raise the prices of consumer goods.
It can also lead to higher mortgage rates in the process, as inflation is no friend of bonds.
To that point, a sitting (or in this case incoming) president can technically affect mortgage rates.
But again, it’s more of an indirect effect.
Trump has made it clear that he wants mortgage rates lower, despite what that might do to the already-depleted housing market.
We don’t really need more demand at the moment, we need more supply.
Increasing demand by lowering prices would not necessarily be in the interests of the majority, namely the renters.
Although it would help those who have recently taken out a home loan at a much higher interest rate as they could do an interest and term finance pencil much better.
It is also important to note that what a president says and what they actually deliver are two very different things.
And promises are hard to keep when there are many outside forces along with independent economic data-driven politics.
Could a president play a more direct role in mortgage interest rates?
The caveat is that a president could become a bit more aggressive if they were to take direct action against the Federal Reserve or reinstate a program like Quantitative Easing (QE).
There was talk that Trump himself would set rates and/or replace Fed Chairman Jerome Powell.
In this connection, he could take a more direct approach to setting monetary policy and try to manipulate mortgage rates. But that might be unlikely.
A more realistic way to push mortgage rates would be via another round of QE, which was the government’s MBS buying program that led to a glut of mortgage demand and much lower interest rates.
A president could certainly argue for this, but they would still need support and a good argument to do so.
But a direct order from the president to make the 30-year fixed X percent just isn’t in the cards.
At best, the president has indirect power over mortgage rates
To summarize, the simplest way to look at this is that the US president has an indirect influence on mortgage rates.
I will say that mortgage rates have gone up a ton recently in anticipation of the incoming administration.
So there has been a lot of speculation based on Trump being the next president.
Which again is indirect because Trump would actually want the opposite to happen.
But it shows you the power a president has in terms of influence and expectations.
If you’re trying to track mortgage rates, though, it might be better to keep looking at the financial data rather than the suggestions thrown out on a weekly basis.
Or the supposed impending trade wars and tax cuts and the like.
Ultimately, bond traders will continue to care most about financial data to drive their decisions.
And if data shows the economy is weakening, mortgage rates are likely to move lower under President Trump.
However, if the economy shows strength, or if inflation appears to resume due to the new administration’s policies, interest rates are likely to rise.
The most important thing here is that no individual sets mortgage rates, whether it is the President of the United States (POTUS), the Chairman of the Federal Reserve, or the Secretary of the Treasury.
It is the free market that determines mortgage interest rates just like everything else.
Read on: Does the Fed control mortgage rates?
